Advertising Technology

Two Years Later: The Economics of Programmatic Ad Buying (aka RTB)

ChoiceStream's Bill Guild on 'The Economics of Programmatic Ad Buying (aka RTB)'This column was written by Bill Guild, VP of Product Management and Marketing at ChoiceStream, a company that improves ad relevance and performance with the most accurate and effective programmatic media buying for branding and direct response campaigns.

Back in 2011, industry pundits panicked saying RTB would lower the value of eCPMs, and all anyone would get was remnant inventory. It was the end of online advertising as we knew it. Remember the Digiday article, “Will RTB Lift CPMs?” where Kirby Winfield, SVP of campaign verification at comScore, and Zach Coelius, CEO of Triggit, had it out over Twitter and the pages of Digiday about whether or not RTB would positively impact the online advertising business by lifting CPMs, or simply allow them to plateau at a severely discounted price? I wonder if that steak dinner ever came to fruition?

Fortunately, hindsight is 20/20 and we know that RTB has completely transformed the way brands advertise online—and I would even go so far as to say, for the better. There is still remnant inventory being bought and sold, but today we are seeing premium inventory and even video being sold via RTB. Furthermore, white-labeled RTB solutions—also known as Demand Side Platforms, Ad Networks and the like—can be found at virtually every trading desk of every ad agency across the globe. So despite the uncertainty and arguments two years ago, RTB has clearly disrupted the digital advertising industry, growing from barely $1 billion in US ad spend in 2010 to forecasting to be more than $4 billion in US ad spend by the end of 2013 (Forrester). And here’s why it’s doing so well.

The Economics of RTB: Conflicting Realities

Sometimes you have to look back in order to see what’s ahead. I’m going to take you back to your Economics 101 class—if you never took one, here’s a quick lesson.

Let’s assume the online ad industry has inelastic demand—meaning it does not change regardless of price or supply—and a very elastic supply—meaning it is always changing when the parameters of a situation change. Both of these statements are accurate to the way the online ad industry exists today: Brands want online advertising regardless of any other considerations. And with more than 50 million new websites popping up every year, it’s easy to imagine that the supply of inventory online is endless—with the exception of video and some new native formats.

Looking back upon Winfield and Coelius’ arguments, they were actually both right in their forecasts for RTB. A lot of remnant inventory has made its way into the real-time exchanges, and the competition to sell it tends to drive prices down. On the other hand, the competition to buy premium inventory—which also exists in the real-time exchanges—typically drives prices up. But in an ideal marketplace, both of these conflicting realities would exist simultaneous within a real-time exchange. I’m talking about brands doubling their return on investment – getting the same results while spending less on media. At the same time, the media that can achieve this for a brand will be very valuable and will be bid up to that value.  The brand will achieve ROI by being more efficient with each impression, and the publisher will maintain pricing by delivering valuable impressions.  Obviously, not all impressions will be valued by all advertisers and that is where market forces will change the current reality.

Enter the more advanced RTB technology and birth of value-based buying.

Value-based Buying & What it Means for Brand Advertisers

In its simplest form, value-based buying is the practice of setting the bid for an impression based on the value of that single opportunity within the broader campaign. For example, if an action (say a conversion) is worth $100 and the probability of getting a conversion in the current environment is 0.5%, then the value of the impression is $0.50. On the other hand, if the same campaign is nearly fulfilled and the ad opportunities like it are plentiful, you may only want to bid $0.35 to reduce the chances of winning and spread out the buying over the remaining duration of the campaign.

Today all of this can be achieved with more advanced RTB technology. This new level of optimization not only allows brands to become smarter buyers, but also creates more differentiation between premium, remnant and a new class of inventory, valuable—or as I call them “choice”—impressions. The entire point of value-based buying is that brands will only pay for the impressions that will deliver results, and will pay what they are actually worth. Some of the impressions currently known as premium will perform well and trade at high prices.  Others will not.  At the same time, some of the impressions currently classified as remnant will perform well and will also trade at high prices.  There will be valuable and not-so-valuable impressions, but they will be distributed differently across publishers.  As for advertisers, there will be no more wasting ad budget on the high CPMs for premium inventory that results in very low clicks and conversions. If you choose to do that fine, but at least you know you don’t need to.

The end result is a more dynamic marketplace—a laissez faire of sorts—because the value of each ad opportunity is different to each campaign, bids will vary greatly and spend will tend to spread out more evenly across varied content.