“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Hasan Arik, Founder and CPO, Redmill Solutions.
Brands are feeling the pressure to cut costs as the global economy remains uncertain. Some are even appealing to agencies to extend payment terms to get a handle on their finances – and they know it’s worked in the past.
At the height of the pandemic, 37% of brands negotiated increased terms, dragging payment windows out to 120 days or more. Ideally, this would have been a temporary measure, but ongoing crises have kept the trend alive.
But concerns are growing. In the UK, the government launched the voluntary Prompt Payment Code (PPC) to incentivize faster payments. PPC-enrolled companies must commit to settling 95% of invoices within 60 days or be removed from the program. Notably, Unilever suffered the consequence when its average time to pay suppliers, including advertising and marketing partners, stretched to 62 days.
And agencies are increasingly taking matters into their own hands as well, joining forces to fight late payments under the banner of industry body VoxComm. However, there still hasn’t been enough meaningful action.
It’s time for payment terms to be pruned to reasonable lengths to restore brand-agency relations and ensure supply chains don’t become overburdened with debts.
Why brands push for extended payment terms
There are three main reasons brands push for longer terms: to hold on to their money for extended periods and dictate payment terms, to appear to shareholders that they are being run more efficiently than their competitors and to raise capital without going through a bank.
This is not a new strategy. For many years, US manufacturer Stanley Black & Decker, Inc., has convinced vendors to allow more time to pay its bills to free up cash to invest into operations, effectively using extended payment terms as a form of loan. Now, more brands are taking the same approach, using money that is owed to agencies to bolster cash flow.
Unsurprisingly, it’s rarely marketers that are behind these decisions. For about 40% of companies, it’s finance departments and CFOs that delay payments.
How payment debt increases costs throughout the supply chain
Not only do ever-lengthening payment terms strain brand-agency relationships, but they can also cause costs to trickle down the supply chain. For example, if an agency agrees to a brand deal for longer terms, it will often in turn seek out longer terms with media owners.
If a media owner has this debt passed down to them, and they don’t have the liquidity to support the terms, they may respond by raising their prices. This will send increasing costs back up the supply chain, and advertisers could end up paying more for inventory.
Costs passed up to brands add up even more when the need for boutique payment services such as FastPay, which assist agencies in the management of lengthened terms, are thrown into the mix.
Marketers must measure if long payment terms are a false economy
Longer payment terms aren’t all negative; they can give brands a competitive edge and can even be a competitive advantage for agencies when they’re trying to win new business. They can also provide a sense of security during this period of rocketing global inflation by fixing fees at past rates.
While the threat of recession looms, extended payment plans will be a fact of life as more brands turn to them to maximize their spend. What brand marketers must scrutinize is whether such a tactic is truly cost effective and how it adversely impacts costs of media and, ultimately, sales.
To do this, marketers need to have a clear and holistic view of their media data. This allows brands to truly understand the broader impacts of longer payment terms, compare them against shorter-term proposals and decide which terms are more effective. For example, an agency may offer a discount for swift payments, which could be more cost-effective than dragging them out.
Ultimately, there needs to be a wider analysis of the consequences of longer payment terms. This could require some challenging conversations with procurement teams and CFOs, but if nothing is done, then the industry risks being caught in a spiral of debt.
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