Little Known Fact: Facebook PMDs Must Disclose Arbitrage

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facebook-arbMarking up cheap Facebook inventory has been a lucrative business for a range of companies in its Preferred Marketing Developer (PMD) ecosystem. And Facebook is fine with that practice, just so long as it's clear to advertisers just how big of a cut their partners are taking.

But do advertisers know, and do they care?

To support price transparency Facebook has, for about the last year, had a policy in place requiring third parties selling ads on its platform to disclose on request what they paid for that media.

Facebook lays out the policy in its Ads API guidelines this way:

"You must disclose to your clients the actual amount that you spent on Facebook advertising based on the auction pricing, including the actual Facebook metrics (e.g. CPC, CPM rate) and the amount you charged as fees. We reserve the right to disclose this information to your client upon their request. We may require documentation from you to ensure your compliance with this policy."

It's a unique demand, equivalent to a large mall requiring retailers to disclose their wholesale costs to customers who ask. And it appears to go beyond what other large digital platform companies demand of their marketing partners.

It's not clear to what extent advertisers and agencies are aware of the policy.

Two PMDs I spoke with recently – Brand Networks and TellApart – said advertisers by and large have not inquired about the transparency requirement, but they would welcome such interest.

"I think it is a huge difference from a policy perspective," said Rob Leathern, chief product officer at Brand Networks. "It is a very different approach, but most advertisers still don't know they can get this level of transparency."

Would it bother them if they knew? For some it might. One Facebook advertiser was recently upset to learn that $21,000 in media spend placed through a Facebook partner was found to consist of $9,000 in media costs and a $12,000 fee, according to a source who spoke with the marketer.

Another possibility is that the advertiser might care about media costs, but for some agencies, ad tech margins are the last thing on their minds. "They want to shuffle spend through the door," said one executive at a PMD company.

For others, transparency is key. Digital agency Essence handles much of its media buying in-house. Chief Strategist Andrew Shebbeare says programmatic buying has helped digital marketing evolve into a meritocracy, adding "Meritocracy only works with transparency."

He continued, "A policy of separating media cost from markup is good for brands and the whole ecosystem. Platform and service businesses should be compensated fairly for the value they add, but opaque 'all in' pricing encourages them to take credit for value they are not creating - for example the value of a brand's first party data. When you look beneath the surface, you often find that low-performance tonnage is being cross-subsidized by supernormal margins on higher-performance line items. When you blend performance through opaque pricing, you are missing out on a large slice of the programmatic opportunity."

Neo@Ogilvy, the digital marketing arm of Ogilvy, has taken advantage of the policy. Like Essence, it buys media on behalf of its clients through an internal team and does not mark up costs. In the rare cases when it uses managed services, it binds partners to disclose the actual rates they pay and believes media costs should matter to clients.

Aside from providing more visibility into performance, Facebook's price requirement may also serve to control prices. Even if advertisers don't often request price info, the possibility that they might could put a leash on runaway margins.

"The message could be, 'Hey, don't overcharge your client," said TellApart CEO Josh McFarland. "Maybe there's a little bit of that specter, just keeping everybody honest."

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4 Responses to “Little Known Fact: Facebook PMDs Must Disclose Arbitrage”


  1. Dogan Akdag says:

    It should be same in Google Adwords, but I checked the policy and can't find. Adwords is better in so many way than FB. However in this topic, it seems Mark is one step ahead of Sergey & Larry.

  2. John Were says:

    Transparency and the unbundling of media costs from services is going to revolutionise the media space. It's not new of course. It's quite common among specialist paid search agencies. It's a lot less common in the display world which still has many echoes of blind, arbitrage-led ad networks despite the universally accessible nature of a lot of digital inventory in 2014.

    We are fully transparent with our clients but we regularly get asked to bundle our fees back into the overall cost as 'the FD won't like it', or 'the client won't like it'. This will change over time but there is a common attitude that it's easier to call it 'media' rather than think about the complexities behind that umbrella term; even though thinking about the complexities can rapidly lead to cost savings while simultaneously increasing effectiveness of effort and media spend.

    Once service costs are unbundled from media cost, lots of interesting things happen. Arbitrage doesn't exist. The incentive to bid for as much budget as possible doesn't exist. Longer-term trusted relationships develop which allow for consistently incremental work as opposed to 1-3 month test campaigns. Low volume, high value media opportunities can be leveraged without pressure to 'spend the budget' in order to make the bundled service fees. High value media opportunities can be accessed regardless of CPM cost. Competition for the advertiser's budget is controlled. The advantages of this approach are multiple and significant for both advertiser and quality service provider.

  3. Interesting and thanks for the article, Zach. I didn't know this. In my experience, if as an advertiser you're worried about your vendors' margins, you're focusing on completely the wrong thing. If you're getting a good ROI out of your spend, then your vendor probably needs that margin and is using it wisely to benefit you. When advertisers take a nickel-and-dime attitude, they usually restrict themselves to sub-par solutions without ever considering the benefits that might come with higher vendor margins. On the other hand, if you're paying top dollar and getting poor ROI, that's a red flag that maybe your vendor's margins are too high, but you don't need Facebook to enforce that for you. I'm sure Facebook has a long list of good reasons for having this policy, but I find it a little silly and naive.

  4. Rob Leathern says:

    It's not that new of a rule, but recently hasn't been pushed as hard as before since Facebook hasn't for a long time been interested in pushing fan aquisition. Also I agree with Myles that if true ROI is there it doesn't matter, but some of the early and (now defunct or on their way to being defunct) marketing developers sold the dream of fan acquisition as annuity to customers at fixed rates. AzoogleAds, Spruce Media and others grew rapidly and disappeared almost as quickly with these strategies. Facebook still makes some allowances in its policies for FBX buyers since DSPs are somewhat more dependent on arbitrage than other marketing developers, but it is smart for them since they don't want their ads to seem expensive since brokers are eating up an unknown margin in between: http://www.huffingtonpost.com/rob-leathern/why-advertisers-arent-asking_b_2575122.html

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