PRINCIPAL BASED BUYING: The industry needs to have a broader and balanced view
Recently, I have read multiple platforms published writeups on Principal based Buying in media and one of the articles even referred to it as the agency’s controversial growth engine.
The only reason its seen as a controversial business is because the agencies are not disclosing the commercial terms they are negotiating with the vendors and business partners. This is where the industry needs to have a broader and a balanced view and I feel that the last few pieces that I read were viewing this whole thing from a single one-way lens.
I have worked with holding groups for over 20 years of which 11 years were with the group investment, trading and specialist units. 9 years as a strategy and planning head and 3 years leading broadcast sales. I feel confident in saying that I have a 3D view of principal-based buying. The investment point of view, client management view and the vendor perspective.
In my view, the process is straight forward. All holding groups have specialist units, underlying business model is the same, the names are different, and the models varies depending on the organizational structure, but the model isn’t questionable. Why? Because only those clients who choose to sign up for the program are part of the products offered. None of the groups or the agencies plan or execute trading products without seeking client’s permission and consent. The agencies present these products to clients, the structure is explained to the procurement and all contracts are vetted by the legal and commercial departments of the clients.
Why I feel the industry needs to have a broader and balanced view? If we try to understand the model in more detail. It is very much like a marketing or a brand’s business. Like the brands cannot disclose its manufacturing and sales price to the consumers, Broadcaster cannot disclose the cost of production vs. the premium they charge on big-ticket items, for a e premium content property. The same principle applies in case of Principal based buying.
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One of the arguments from the clients that choose not to sign up for the program generally is that the agencies are negotiating higher value including their billings. In my view, it’s a mutual benefit. How? Assuming a client has a billing of $20 and they choose to shift their business to an agency that has a billing of $100. One of the reasons the client chooses to shift the business is to take the pricing advantage on the gross billing of $120 and not just $20 or an agency with a billing of $80.
Principal based Buying can also contribute positively to a client’s media, especially at times when the clients have major budget cuts. They could manage the same amount of exposure, committed by the agency in the annual planning by buying more for less. In some cases, it helps the clients to bring down CPMs and CPRPs and in some cases the reach targets are delivered by incorporating specialist buys in the media plan. So, it is not right to say that principal-based buying works in isolation with a singular focus on revenue generation only. In times of volatility and turbulence, the clients can mitigate their risks by not entering long-term vendor deals or fixed contracts. The model provides flexibility to the clients to make changes and shifts in their media plans as per the needs with no penalty clauses. From a publisher perspective – some may not agree but even for a publisher the model is beneficial because it protects them from client budget cuts. Publishers and vendors enter the principal-based buying deals not based on individual agency deals or clients but at a group level which secures their business also.
From an accountability perspective, it is easy to keep track principal-based inventories on offline media. All placements can be tracked and audited. However, it is complexed when it comes to digital. The issue in case of digital is not much about the how much the agency is monetizing the buys but more about the flow and supply chain management because it gets really complicated especially when it comes to programmatic. Some of the agencies have well managed trading desks while some have a programmatic offering but lacks internal structures, management and strategy which makes a client uneasy. With the increased quantum of digital spends (programmatic buys), agencies have been slow with coming up systems, processes and explaining the concept to satisfy clients on principal-based buying dynamics in this space. This is one of the reasons, clients have or are considering shifting digital buying in-house.
In a nutshell, Principal based Buying is indeed a source of revenue generation for the agencies but at the same time, it drives benefits for the industry also. The ratio has increased over the past few years, but it is not something the marketers and the procurement teams are not aware of. Infact one of the reasons the ratio has increased is that the clients want more or the same value with reduced media spends year-on-year.
Anything in excess creates an imbalance and leads to inefficiencies. Principal Based Buying is a powerful offering that can create value for the clients if the right mix is applied. On the agency front. Agencies are required to explain the concept to the clients with more clarity. In a pitch presentation when only the last 10 or 15 minutes are allocated to explain such a complicated offering like this to a client, it only creates confusions and doubts. Agencies should reconsider packaging and improve sales pitch of products where principal-based buying is applied.
ICF-ACC | Team Coach | PMP® | CSM® | OCM Lead | Capability Development Strategist | Novo Nordisk
6moThank you for sharing this, Fahad Bashir Bhura 👌 You have emphasized a crucial aspect of client-agency communication. Agencies should prioritize not only the content, but also the delivery and timing of their pitch to ensure effective communication of complex offerings, such as Principal Based Buying.👍