Inside The Black Box Business Of Influencer Marketing

Brands are hesitant to go all-in on influencer marketing, which much like the early days of programmatic, is rife with black-box business models.

Pricing and compensation vary significantly across influencers, and a lack of benchmarks and measurement make it difficult for brands to know if they’re getting a fair rate.

Confusion around the value of influencer campaigns allows influencer agencies, which manage influencer relationships and sometimes provide creative services, to charge nontransparent markups.

“The lack of transparency is the biggest problem,” said influencer consultant Yuliya Gorenko, who formerly led influencer marketing at L’Oréal in the Ukraine.

But influencer marketing, on track to hit $15 billion in ad spend by 2020 according to Business Insider Intelligence, is quickly becoming a staple of the media plan for many brands.

Despite their concerns, marketers work with influencers and their agencies because they want to reach young, passionate audiences. But many are starting to question the value of their investment and, like in programmatic, will require more clarity before devoting even more media budget to influencers.

“Advertisers will be the drivers of greater transparency,” said Kieley Taylor, head of paid social at GroupM, which works with influencer specialist agencies on client accounts.

The problem with influencers and their agencies

The influencers themselves drive the black-box model, as many charge arbitrary fees based on the number of posts they create or their follower count. These fixed fees are preferable to influencers, as it creates a reliable revenue stream.

But because brands increasingly demand accountability and measurement, some influencers are pricing on a CPM basis, a cost per performance metric or some other measurable cost-per business model. 

“There’s lots of different ways to skin the cat right now,” Taylor said.

Influencer agencies present another layer of opacity.

“A lot of them are small startups and their processes are not set up yet,” Gorenko said.

But it’s hard to have definitive processes because the brands themselves have different playbooks when working with influencers.

“Every brand is trying to find the best play for them to minimize risks and maximize ROI,” said Polina Haryacha, CEO of gaming influencer agency Cloutboost. “There are no policies, regulations or benchmarks.”

And the influencers themselves don’t adhere to any processes either.

Influencers work with multiple agencies at once to see who can provide the most lucrative deal. If an agency promises an influencer to a brand, the influencer can drop out if they get a better deal from another agency.

How influencer agencies make money

Influencer agencies charge on three basic models: a commission baked into a CPM, a commission based on a percentage of budget or a flat monthly fee. Standard commissions are 15% to 30%, but sometimes inch up to 40%.

The actual dollar amount the agency is making is almost never disclosed to brands.

“It’s their current business model to not be forthcoming,” Taylor said.

Without transparency, each model creates opportunities for agencies to game their fees.

Including the commission in the CPM, for example, leaves a lot of wiggle room for agencies to pocket markups.  An influencer agency might give a brand a CPM, then negotiate a cheaper price with the influencer that they represent, without telling the brand.

“Sometimes you can ask for a 50% discount, and the influencer would agree,” Gorenko said. “As a client, you don’t know if the agency has gotten this discount.”

On the other hand, when brands pay a percentage of budget, influencer agencies become incentivized to pay more for sourcing more expensive influencers.

And the problem with a flat monthly rate is that the scope of work can vary month to month.

“In one month [a brand may] activate 20 micro-influencers, and the next they want one or two macro influencers, which is a lot less work,” Gorenko said. “How do you estimate a fair fee?”

The only way brands can determine whether they’re being charged fairly by an influencer agency is to compare prices across the market. Often the same exact influencer will cost more or less across different agencies.

What needs to change?

Influencer marketing must develop pricing and measurement benchmarks before brands are willing to spend more money.

On the measurement front, marketers can only track based on whatever metrics the influencer or platform they’re working with is willing to share. Viewing influencer activity across social media platforms is difficult because most are walled gardens. And pricing is hard to codify because performance from the same influencer can vary significantly from month to month.

“The reach of a media outlet is quite stable, but you cannot expect every influencer video to bring you the same number of views,” Haryacha said. “There is a lot of room for speculation and inflation.”

 Like in programmatic, brands will only continue to put up with opacity for so long. Agencies that could get away with marking up fees or peddling expertise they don’t have will likely get optimized out as brands demand more color from their influencer campaigns.

“As they start to hit ceilings on growth, they’ll mature,” Taylor said. “With maturity comes a little bit more transparency, similar to programmatic.”

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