Last week it was reported that yet another very large company – one that spends something in the neighborhood of one billion dollars on advertising and promotions – is seeking 150 day payment terms on invoices they are responsible for. This means that when said company incurs costs for advertising product (say, media) and services (say, the planning, buying, and placement of that media) and the marketing service provider sends them a bill, the company won’t pay it for at least 150 days.
The advertiser is Coty, a multinational fragrance manufacturer. They are but the latest in a long line of major, massive advertisers to ask for desperately long lag times in payment for services rendered.
In the case of Coty, the agency OMD opted out of the pitch, as have some other holding company agencies, with one of the ostensible reasons being the onerous payment terms.
Why would a company ask for terms like these? The answer is simple. Because they can. So long as agencies somewhere out there will take them, advertisers will ask for them.
But this begs one or two larger questions. If an agency is selected based on their acceptance of draconian payment terms, it means that everything else that agency provides is less important than the acceptance of payment terms. It means quality of output, level of service, and even COGS don’t really matter that much to the advertiser. It means that whatever the advertiser sees the agency providing is the ultimate commodity. Even costs and service doesn’t matter any more, which used to be the distinguishing features of a commodity.
The second question this makes one ask is, why would an agency accept such terms? This is actually easier – and sadder – to answer. It’s because agencies are afraid. Decades of downward cost pressure on fees, upward cost pressure on media (and most media costs have gone up, not down), the dwindling tenure of the CMO and the subsequent change in agency relationships the vacillation in that office instigates all conspire to create conditions that are easy for advertisers to ask for these kinds of payment terms and hard for agencies to turn them down.
But turn them down some of them do. Though I wouldn’t be surprised if there are other factors in play when that happens.
What to do about this unhappy trend? Well, refusing to accept is one thing to do. Though agencies have less and less hand these days to do that. So it falls to the media properties to push back. They are the ones ultimately being hit by increasingly latent payment terms. It’s been suggested that if it got out that a media company refused to accept 120 or 150-day payment terms, someone else would just jump in to fill the gap. But this assumes that all media are created equal. While extreme, I’ll use the Super Bowl as an example. What do you replace the Super Bowl with? If a client has been convinced that media vehicle X is the one for them, all media vehicle X has to say is that in order to run with media vehicle X you have to pay on their terms, and it will happen. There is some boundary-testing going on with the payment terms we hear about that are so long and ugly. I’m sure that if the media property is a must-buy, it gets bought, and it doesn’t have to wait 4 months to get paid.
Of course another route to go is the increasingly popular public shamming on social media. When a cold, heartless multinational worth billions of dollars is exposed for basically making it impossible for agencies and their media vendors to pay their employees properly, or forces them to take out business loans or tap capital reserves because the client’s payment terms are staunching cash flow, well… maybe that could work. The populist climate today is ripe for it.
Be all of that as it may be, we will continue to see 3, 4 and even 6 month payment terms crop up here and there so long as the industry not only remains in fear of reprisal for refusing such terms, but so long as the marketing service provider doesn’t offer products or services distinguished enough from their fellow travelers to warrant the client valuing them enough to treat them with the respect they deserve.
Jim Meskauskas is a co-founder and Chief Strategic Officer of Media Darwin, a consultancy specializing in strategic planning of commercial communicative action. He’s a medialogist who has spent the last 20 years living, breathing and thinking about how to use media to move people to action. Outside of that, his likes are horror movies, Southeast Asian cuisine, his wife and his cat — not necessarily in that order. His dislikes are mean people, people who text while walking in or out of the subway entrances, pestilence, war, famine and death.