Econometa

—– Outsourcing ad buying and selling —–

I’ll again put the picture first, with explanations to follow.

This depicts how ads flow from advertisers to publishers, including the roles of ad agencies and ad networks. Like last time, you can click on the diagram to get a bigger version.

In this post I’ll dive more deeply into the particular viewpoints of advertisers and publishers, and how they translate into motivations in the ad economy.

—– The advertiser viewpoint —–

From the advertiser viewpoint, the key question is:

“How do I increase sales at the lowest cost?”

Advertisers have traditionally viewed their activities as falling into two categories: branding and direct response. Branding builds general awareness and future likelihood to buy, while direct response attempts to directly lead to a sale. Although this line is blurring, branding is generally associated with graphical CPM ads, while direct response is associated with CPC or CPA ads.

Ads are sometimes part of campaigns that attempt to optimize effectiveness by controlling the order, duration, frequency, and context in which users see the various ads in the campaign. Campaigns can extend across various media including the Web, and managing them is often outsourced to an ad agency. This outsourcing includes coming up with actual advertisements (creative) and/or placing these ads and tracking their performance or return on investment (ROI).

ROI, which is usually expressed as the ratio of gain over investment, has traditionally been difficult to measure, since there was no way to know what ad(s) influenced a given purchase. In the case of advertising investments, ROI is sometimes called return on ad spend (ROAS), and is calculated as follows:

ROI = (Value gained from ads - Cost of ads) / Cost of ads.

One of the advantages of the Web is that ROI is immediately apparent in the case of direct response ads that lead to a sale. The average profit per impression is

CTR * CR * Average profit per conversion

so the ROI is

ROI = (CTR * CR * Average sale per conversion * 1000 - CPM) / CPM.

This calculation is even more straightforward if the ad space is paid for on a CPC or CPA basis; if the action is a sale in the latter case, the ROI is simply

ROI = (Average sale - CPA)/CPA.

Thus CPC and CPA compensation shifts the risk of mis-estimating CTR and/or CR to the publisher, even though these measures are mostly affected by the creative and conversion efforts of the advertiser.

—– The publisher viewpoint —–

From the publisher viewpoint, the key question is:

“How do I maximize the compensation I get for my ad inventory?”

The first answer is to simply maximize the quantity of ad inventory. Ad inventory depends upon page views and ad space, so publishers can either try to attract more viewers or increase the number of ads per page (which tends to adversely affect eCPM).

The second answer is to maximize eCPM. When buying ad space, advertisers are willing to pay more to reach the right users at the most receptive moment. Thus the key to increasing eCPM is user targeting and content targeting, as previously detailed. Content targeting is straightforward enough, but user targeting runs two risks:

- Asking for user data via a registration barrier is a hassle for users, and drives many of them to leave or enter false information
- Inferring user data by tracking or correlating to an offline database can raise privacy concerns

Clearly then, a key challenge for online marketing is to approach the end goal of individualized or one-to-one marketing while preserving the user’s privacy and sense of control.

Just as advertisers outsource to agencies, publishers can outsource ad sales to ad networks. Ad networks aggregate ad inventory across many publishers and provide a single place where advertisers (or agencies) can buy ad space in volume. This helps lower the cost of selling for publishers with ROS or “remnant” inventory and smaller publishers with less inventory; similarly, advertisers and agencies can more easily buy in volume, lowering their cost of buying.

Next up, Part III: Search engines and intermediaries.

This entry was posted on Wednesday, January 25th, 2006 at 4:47 pm and is filed under Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.