A New Kind of Bid: How to Turn Things Around with Reverse Auctions

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Reverse Auctions Drive Prices Down
Several companies — AdAuction among them — experimented with the traditional auction approach only to fail because the model itself didn’t meet the needs of the participants. Radio stations are justifiably nervous about their bargain remnant rates becoming public — and what that might do to their negotiating power when it comes time to sign long-term advertising contracts — while advertisers are not motivated to participate in an auction that bids their prices up.

A reverse auction turns the traditional approach on its ear, allowing stations to compete for advertisers’ dollars. Where a standard auction invites the buyers to do the bidding and the highest price wins, in a reverse auction, the sellers do the bidding and the lowest price wins. (In the case of remnant radio, advertisers are the buyers and radio stations are the sellers.) This keeps prices from being driven irrationally high, and instead tests the market in terms of how low the stations are willing to go.

These are the starting points for a potentially successfully auction marketplace. But merely slapping the reverse auction model onto any remnant airtime still is not good enough. As we researched how to design Bid4Spots, our online marketplace for remnant radio airtime, and what would make it an auction that radio stations and advertisers actually would use and value, we found a few deal-breakers for each side — factors that the unsuccessful companies did not take into account.

o There is a “perfect moment”. Obviously, radio stations would prefer to sell their inventory in advance through the normal sales process. But there’s always unsold airtime. By Thursday morning prior to the broadcast week, that unsold inventory is truly “un-sellable” — it’s too late for most advertisers to purchase the standard way. Rather than lose out on revenues, stations often are willing to cut their losses and sell it at the last minute at a discount. This is the magic moment, and it’s when the auction must take place — close enough to the next broadcast week that a station manager knows for sure that he cannot sell the inventory through the regular sales channels, yet far enough away to put the spots through the traffic department.

o Radio stations want their remnant rates to remain confidential. This may seem to fly in the face of the “open network” Katz proposes. But while he sees CPM-based pricing as ineffective, we see it as an equalizing factor — enabling stations to safely sell remnant at deep discounts (without risking devaluing their long-term rates), while still granting advertisers a level of control over the quality of the advertising to reach their target audience. Advertisers declare a CPM ceiling up front; radio stations bid against each other to see which one will match a particular advertiser’s rate. The winning rate remains confidential, safely cloaked behind the system’s CPM-based ranking index.

o Advertisers want more control. With typical remnant solutions, advertisers are only allowed to select the market — no other demographics are under their control. Their spots are sold on a wide rotator basis and run at the station’s discretion, they can be pre-empted, and advertisers don’t know which stations ran their spots. To gain advertiser support, it’s essential — and, yes, possible — to design a system that allows them to specify demographics, market/format, day and day part, budget and maximum allowable CPM.

Clearly there’s no one-size-fits-all auction marketplace approach for all media. The Internet certainly provides us with tools to simplify the processes across multiple channels like never before. But that doesn’t discount the fact that every medium and its participants have unique needs that must be accounted for if any new solution is to be accepted and successful.

So the question needs to evolve from, “Will an auction marketplace work for advertising?” to “Can we adapt the auction model to work for this particular advertising?” We’ve seen it succeed in radio — with roughly 2,000 radio stations and several hundred advertisers participating in our reverse auctions each week. And I’m willing to bet that similar, tailored methods can successfully be applied to unsold advertising elsewhere.

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