Why publishers should stop selling remnant inventory

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Typically, online publishers make their money through the sale of online display advertising, with a few making a lot of money from paid search. But the way that publishers monetize their sites has evolved over the last 10 years to a point where a lot of energy is expended on work that doesn't pay off very well.

The one thing to keep in mind as we progress through this discussion is yield. From a publisher point of view, this is essentially the profit on inventory sold. It's always important for publishers to consider yield in any discussion of revenue, because while they may sell inventory at a higher CPM through the human premium sales channel, the cost of sales is always going to be very high there. So when you strip away cost of sales and technology costs, what revenue the publisher keeps is its yield.

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Many publishers began selling their remnant inventory off at wholesale prices to ad networks and an ever-changing and evolving ecosystem of other vendors who buy cheap remnant inventory, apply some "special sauce," and resell the same inventory for a higher price. This arbitrage has evolved as many publishers saw an opportunity to liquidate their entire pool of inventory at any price and never leave any money on the table. But liquidating all inventory at "any price" is a horrible idea, and has led to many unintended consequences, namely driving a perception of "unlimited" inventory out to the market. There's a reason that the broadcast networks limit the amount of remnant sales they do to approximately 10 percent.

I've stated before that most companies get addicted to "bad"' revenue that operates at a net loss. I would argue that almost any remnant ad sales at wholesale prices sold in bulk to resellers is "bad" revenue. While cost of sales may be much lower on this sales channel, all the value gets stripped off the inventory, and then the final clearing price of the inventory is super low -- probably well under $1 CPM -- probably as low as $0.30 in many cases, and often under $0.10.

Yahoo recently announced that they're going to stop selling inventory this way, and I think this is one of the gutsiest and smartest things I've seen a big publisher do in a long time. Here's why:

Publishers have gone to immense effort to build a refined product to sell. Your audience is not a "raw material."  You've taken the effort of cultivating an audience to consume your content, and you've developed a sales force to represent this inventory. By selling wholesale to a reseller, you've turned that inventory into a "raw material," and it's up to the reseller to then refine the inventory and make it more valuable.

In a perfect world, you would sell your refined audience through direct sales channels and liquidate it all at a very high yield. Since this is simply unlikely for basic human scale factors, there needs to be secondary sales channels that don't suffer from the same scale problems. One way that publishers have been trying to handle this problem is by applying a dedicated human sales force and yield optimization team to manage their remnant liquidation.

In my opinion they should have a dedicated team to manage selling inventory that "fell through the cracks" of their human sales force, but this is not remnant wholesale practices. They should only be selling the inventory that can be sold as a "refined good," not a "raw material." All publishers have high quality inventory that is not able to be sold by their sales team, even if they are "sold out" in the publisher's sales interfaces.

Because of the way that inventory prediction works, there is generally more actual available inventory than most systems will allow to be reserved. This is because of a technical reason -- since the industry has told software engineers that guarantees are being made contractually, it's using a very high confidence interval on the prediction of avails. Confidence intervals specifically refer to how confident the engineers are that the inventory will actually exist, which is a mathematical prediction.

Since the engineers are being conservative due to the nature of the contract being guaranteed, there is actually always inventory that has sold out in the sales system due to high demand, but at delivery time there is actually more in existence. Additionally, since most publisher side sales systems allow (for very good reasons) the sales team to pull avails and reserve for a short period prior to the deal closing, hoping that their IO will be signed, this causes a lot of premium inventory to get locked up until it's too late for another sales person to actually sell high demand inventory.



Joe Pych
Joe Pych December 15, 2011 at 4:06 PM

Eric, thanks for sharing this article. The economics of guaranteed sales vs. remnant sales are staggering from a CPM perspective. The big yield variable is cost of sales. Selling guaranteed inventory efficiently and effectively is the key to higher profits. There is a lot of opportunity there and I wonder why ad tech companies are not more focused on helping to solve this problem. It seems to me that tech for unloading remnant inventory is over-invested and tech for selling guaranteed inventory is under-invested. What do you think?