To date, I’ve spent nearly my entire career working in the ad business.  Through the years I’ve gotten to see the industry from a few different angles.  I started out at an ad agency in a media planning/account management role, then moved to analytics, and now I work for a technology company.  During my time in the industry I’ve noticed a strange tendency that permeates the ad industry: promiscuity.

Now, I’m not talking about sexual promiscuity, or specifically about the people in advertising, but rather, I’m referring to business relationships and client/vendor promiscuity.  At nearly every level of the industry, companies tend to lean toward working with multiple vendors to meet their advertising needs.  Said a different way: nobody wants to get stuck in a situation where they are too reliant on any one  company for advertising-related needs.

Let me share an example.

When I worked in the agency world, I had the opportunity to service about a half dozen different clients in a handful of different industries.  I helped advertise everything from cars, to financial product, to pharmaceuticals.  Each of the clients I worked with had unique needs and different preferences when it came to advertising and media – however they all shared the preference for promiscuity.  In fact, almost all of them actually used multiple full-service agencies to service each single account.  At first, I remember thinking that it made absolutely no sense.  My agency had the ability to service an entire account (from creative, to media, to strategy) in house, so why would a client want to cut up their business into multiple parts and hand one part (e.g. media) to one full-service agency, and give another part (e.g. creative) to a different agency?  From my perspective as a media planner, it was incredibly inefficient.  Having a team spread across multiple agencies led to all sorts of problems.  It was frustrating, political, and difficult to get things done.  One advertiser I worked with actually employed five different agencies to service one single account.  Life would have been so much easier if our clients had just used our agency for all of their advertising needs.

Why didn’t they?

I originally thought the reason was because they wanted specialists.  One agency was better at media – so they’d use their media department.  Another agency was better at digital creative – so they’d use their digital creative department, etc.  However, I soon learned that this theory was wrong.  The real reason our clients used multiple agencies to service their accounts was because they wanted to limit their liability if any one agency were to go downhill, and they also wanted to minimize the pricing power agencies had over them.

Let me spend a little time here.

If you’re an advertiser that uses only one agency for all of your needs (from creative, to media, to strategy, etc.) and there is a problem at that one agency – for example, they win a new piece of business and pull all their best people onto that new account – then you’re flat out of luck.  You have no other agency options to lean on to ensure there is no interruption to your business.  Also, during contract renewal, if you rely solely on one agency, that agency has more leverage over you in the pricing negotiation.  Since they are the only agency that really knows your business, they can exploit that fact and try to increase their prices year over year.  However, if you have two agencies (or more) working on your business, each agency will try to undercut each other to win more of your business and you will be able to get continually lower prices out of your agencies.

This tendency toward promiscuity trickles down the supply chain as well.

As a media planner I would always make sure that I had at least three or four different media vendors from each category (e.g. ad networks, portals, etc.) on my media plan so none of them were absolutely essential to the plan.  If any one vendor tried to raise their prices, or change their quality of product, I would simply cut them from the media plan and shift spend to their competitors.  Always keeping vendors in competition with each other ensured that my agency would get better prices for our media each year.

By maintaining promiscuity and exerting continual downward pricing pressure, advertisers and agencies send ripple effects down the supply chain to media vendors like websites, networks and ATDs (agency trade desks).  These sources of advertising must also play the promiscuity game, maintaining at least two technology partner relationships that they can play off each other to make sure they too don’t give anyone too much pricing power.

In some ways, the entire advertising industry is woven together in a web of promiscuity that ensures no one player ever gains pricing power over any other.  It can take years, but sooner or later all advertising entities are destined to have their margins compressed to the point of commoditization.

In the long run, the only advertising businesses that will be successful are the ones that can maintain pricing power by continually offering things that are truly novel, or providers that thrive in a commoditized market.

The Tendency Toward Promiscuity in the Ad Industry
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