In an auction-based ad marketplace, each and every ad call is evaluated and the value of each impression is matched to create an efficient marketplace. In such a marketplace, both advertisers and publishers benefit. Advertisers pay what they determine is a suitable rate based on the performance of the network and no more. Publishers benefit because their inventory is appropriately valued; high-quality traffic is rewarded with higher rates, poor quality traffic is penalized with lesser rates. The auction-based model is an incomplete solution though; a truly efficient system exists only when there is an open marketplace based on pay for performance.
Many of the auction-based systems allow the advertiser to place a universal bid across the entire network. The bid is based on the advertiser’s maximum tolerance for a desired result. On the back end, the ad-serving technology attempts to identify what parts of the network the ad performs well and poorly on and then identify certain trends. Once enough data is gathered, the ad server attempts to hedge the high converting traffic with just enough low converting traffic so that the advertiser maximizes their spend while hitting their metrics. Proponents of this type of system argue that the advertiser hits their metrics and diversifies their risk by spreading impressions to more sites.
The only people enjoying the efficiency of this program are the owners of the network, though. The advertiser has spent more than they needed to on traffic that did nothing but increase their overall spend and probably did not spend enough in the places where they should have to increase the delivery of highly converting traffic. The publisher, similarly, potentially missed out on a higher yielding ad. In the SEM world, this is quite similar to the portfolio approach.
By utilizing an open network, advertisers see exactly which publishers comprise the network, view performance by site placement and can adjust bids on a site specific basis to ensure that no impressions are wasted. As an advertiser, if you could see that a handful of sites are providing most of the return on your investment but you are not getting all of their traffic, wouldn’t you want to re-allocate the dollars you are spending on low performing sites and pay a slightly higher rate to ensure you are maximizing the high performing placements? Such a solution benefits all parties involved, including the network.
The advertiser does not expose him or herself to wasted impressions on low performing sites, it also ensures top placement on the high performing sites. The publishers with quality traffic are still rewarded, only more so than before because dollars are now being spent to guarantee traffic on their sites. Finally, the network diversifies its risk by running a higher number of more profitable campaigns instead of relying on a handful of advertisers to make up 90% of their revenue.
By switching pricing from CPM or CPC to a performance based Cost-per-Acquisition (CPA) model, the network can achieve even greater results for all parties. Of course everyone wants to charge CPM; its great for planning and makes people, especially sales people, feel better about the closing the deal. Publishers too love to know that no matter what, they are making something. The problem is that at the end of the day, a CPM deal offers almost as much risk without the upside of a CPA deal though. If the traffic is not converting, the advertiser will cancel and most of the time its with 24 or 48 hours. If you want to retain them as an advertiser, you will have to provide some sort of make good, lower the rate, or possibly even switch to a CPA model. In any event, the advertiser now has the negotiating leverage.
Conversely, if the campaign is converting for the advertiser, it is because they are at or below their desired ROI. The network is doing just enough to keep the advertiser happy and just enough to keep the publisher happy. The sites that are performing for the ad would work for the ad regardless of whether the deal was performance based or not. They might be converting at such a high rate though, that to try to charge the advertiser a fixed CPM rate equivalent to the eCPM rate would be nearly impossible.
In summary, by taking on a higher quantity of advertisers and matching the best performing ads with the best performing sites in an open market on a pay for performance basis, the network achieves three results. First, publishers make more because the advertiser allocates more money to the quality sites to ensure more traffic. Secondly, the advertiser maximizes the utilization and efficiency of its spend because it is paying more to high performing publishers who will now allocate more impressions on a macro level to the network and on a micro level to that advertiser. Lastly, the network diversifies its risk and builds relationships with advertisers and publisher by showing it is committed to providing the best and most efficient results possible.