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Why advertisers need to lose some pricing control

Why advertisers need to lose some pricing control Tom Hespos

The transactional end of the Oreo is about to lose some of its cream. (If you didn't get the Oreo metaphor, read this and then come back. We'll wait.) Don't worry, though, market forces will bring the cream back before too long.

Why? There is a movement well underway to bring transparency to digital ad buys on networks and exchanges. It is highly likely this movement will succeed, and companies on the transactional side of the Oreo will see some very interesting side effects that will shift advertiser and agency behavior.

As always, understanding the future requires us to first take a step back.

Digital media buying first rose to prominence on two basic principles -- targetability and accountability. Let's focus on the former, for now. Seeing an opportunity to focus media investments, many advertisers carved out a role for digital media that centered on using it like a laser to pick off only the most interested or likely-to-buy prospects from a larger target audience pool. While digital was used like a laser, broadcast continued to be used like a bazooka -- aim it in the general direction of your target audience, prepare to cover that target, but also plan on a lot of media weight falling outside where you aimed the bazooka.

This is the essence of the reason why digital had scale problems in its formative years and continues to have such problems today. Advertisers saw its role as that of a highly targeted medium and thus couldn't commit large scale budget dollars because digital couldn't deliver this laser-like focus at broadcast-level scale.

That didn't stop advertisers from wanting to scale investments, though, and they quickly discovered that in order to do that, they needed to loosen controls over one of two things: pricing or environment. Given that choice, most opted to keep control over pricing and loosen up the reins on where the ads appeared.

This notion of delivering targeting at scale across multiple environments is the central promise of any ad network or ad exchange.

Now, through the development and adoption of a new sector of ad technology that most call "brand protection," advertisers are about to get a lot more visibility into where their ads are running across networks and exchanges.

What they're going to find when implementing this technology will be surprising. Network and exchange buyers are going to find that most of their buys are running in environments they never would have considered. Hardcore direct response advertisers are going to find that 80 or 90 percent (or even more) of their buys are essentially backfill. A single-digit percentage of the ad buy will be in environments considered "premium." Most will find that it's that tiny sliver of inventory that's delivering the majority of the campaign's effectiveness.

In the end, this will be a good thing for the industry. But in the meantime, we might see seismic shifts in how inventory is valued and how much advertisers are willing to pay for the small percentage of impressions that actually "work." In the short term, advertisers will no doubt try to keep prices at or below what they were in the recent past. This might hold up for a bit, but not for the long term if we see significant demand from multiple advertisers for the same inventory.

For the transactional end of this industry to continue to function, it needs a floor on pricing. Essentially unlimited supply has driven prices down to the point at which content producers can't make their business models work. Transparency will help advertisers focus on what is working, narrowing the supply quite a bit.

In short, we're going to see scarcity start to drive prices up if advertisers and their agencies are willing to peek under the hood of their transactional buys.

How this will affect networks and exchanges remains to be seen. Networks will be able to do well if they can aggregate the premium inventory most valuable to advertisers. Premium sites may have fewer impressions to offer on exchanges in the long run.

If advertisers want to exercise more control over environment -- and, given the reams of data they'll be getting from brand protection companies, that's probably a good bet -- they're going to have to lose some control over pricing.

That loss of control will ultimately be good for those who make their living producing content for the internet.

Tom Hespos is the chairman and president of Underscore Marketing and blogs at Hespos.com.

On Twitter? Follow Tom at @THespos1 or @_MarketingLLC. Follow iMedia Connection at @iMediaTweet.

Tom Hespos is President of New York agency Underscore Marketing. He is a frequent contributor to industry trade publications and has been writing a regular column about online marketing and advertising since March of 1998. His clients include Wyeth...

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to leave comments.

Commenter: Liz Zedo

2010, June 17

This piece is very related to my CEO's recent blog post title "How to make Real Time Bidding a win for Publishers". Exchanges could make it difficult for publishers to make good sales revenue, but it is not impossible.