The Ad Revenue Waterfall
ADOTAS EXCLUSIVE — In a perfect world, you get what you pay for. For online advertisers, that is especially true.
Typically, ad inventory is sold through multiple outlets in the marketplace. My company calls this publisher ad inventory monetization structure the “Ad Revenue Waterfall.”
Successful media properties generally have a sales structure that includes:
1. Direct sales
2. Publisher representation (sometimes through vertical networks)
3. Ad networks
4. Remnant providers
Each of these four levels of the waterfall represents a different benefit to advertisers.
Direct sales – Advertisers are drawn to buying from the publisher’s direct sales to get customization or ensure premium positioning. For advertisers and agencies, the risks of buying direct are the possibility of an unsophisticated publisher sales and ad operations team. The consequences for an agency of a campaign not going live on time, being poorly planned, not being properly tested and undelivering against a promised media plan can cost advertisers the opportunity to reach their audience, and agencies the ability to bill their advertiser for the campaign. Generally, CPMs and pricing are highest when booking directly with the publisher.
Some media properties attempt to manage all of their ad sales through a direct team, but their “fill rate” is no more than 20 – 40% of their inventory. These publishers may brag about extremely high CPMs in the same breath as they complain about all of their unsold inventory.
These companies are leaving money on the table and failing to optimize ad revenue by insisting on only selling ads directly and at high prices.
Publisher representation – Publisher representation networks, and especially vertical ad networks, offer agencies and advertisers the benefit of targeted media planning, optimization across multiple properties and operational excellence in ad implementation (an increasing challenge in the current rich media-dominated environment).
They also offer the ability to write one check for complex adbuys and the benefit of developing a long-term relationship with the company across multiple projects.
The efficiencies of a vertical ad network allow them to sell at lower CPMs, but the ad space is still premium. Custom implementation opportunities, combined with targeted media buying, delivers high click-thru and engagement for advertisers. A vertical network can also share expertise around campaign effectiveness, offer a third party perspective on the relative popularity of properties and share case studies with advertisers.
Publisher representation companies and vertical ad networks allow media properties to extend their reach to more advertisers and agencies while experiencing the upside of high CPMs and specialized representation for custom implementation. Most of these companies are very collaborative with publishers and offer a revenue share to media properties which can substantially increase their ad revenue on a monthly basis.
Ad networks – Reach buying through large ad networks is the next level in the ad revenue waterfall. Advertisers are drawn to this inventory by the low CPMs and sometimes by the promise of finding their target audience through contextual and behavioral targeting. For advertisers focused on shopping and specific purchase patterns, for example, behavioral targeting can be a cost-effective solution.
Advertisers and brands are increasingly wary of being displayed next to inappropriate content and one of the challenges of buying this inventory can be not knowing where your ads will be served (blind buying).
Remnant – Generally, sites monetize unsold inventory through low-paying remnant networks. These are ads generally run on a performance basis for big reach buyers online. The rise of ad auction technologies, which force remnant buyers to compete based on price, are eliminating opportunities to take advantage of poor ad sales by publishers and buy extremely cheaply in what should be premium ad space. Remnant buys are generally blind buys and there are risks of placement near inappropriate or unflattering user comments.
The recent news that AOL will shut down Tacoda and renegotiate all publisher agreements surprised the industry. As one of the world’s largest behavioral targeting networks, Tacoda’s growth was driven by relatively high rates ($2 – $6 per thousand views) for publishers. Only 35 of Tacoda’s orginal 97 employees remain, according to published reports. AOL says it will integrate Tacoda’s technology into its Platform-A solution, Advertising.com. Former clients of Tacoda may not see the same results with a different publisher base.
Increasingly, advertisers are spreading their budgets across each of these distribution channels, buying premium space in combination with vertical networks and high reach ad networks, and seeing good results.
The challenge is to keep track of the performance of each of these participants and shift budget to companies that consistently deliver high quality audiences as well as good performance.
As these four sales channels mature, vertical ad networks offer an increasingly attractive opportunity to explore the benefits of premium buying.
For brands, a skew towards premium ad space is important, lest their brand and their message be diluted by poorly targeted remnant buys. For ROI-based advertisers, faced with the diminishing opportunity to cheaply arbitrage unsold inventory, now is the time to experiment with premium buying to complement their campaigns and tap into new customers.
Reader Comments.
This whole ad network scenario is a short-term boom and a long-term bane.
Given that you can buy solid inventory at a fraction of the cost, why wouldn’t you use ad networks almost exclusively, especially for test campaigns when you’re trying to optimize creative and call to action?
But ultimately, this whole model is unsustainable. Sites cannot continue to sell an increasing share of their ads at a couple bucks per thousand, and the increasing competition is going to cause ad network failures and consolidation SOON.
I just put up a blog post with more detail on how this is going to shake out.
“Ad Networks Are a House of Cards – But a Great Deal”
http://is.gd/Ste
Jason Baer
Convince & Convert – digital consulting for agencies
http://www.convinceandconvert.com/convince-convert-digital-marketing-blog
I agree with many of Heather’s comments. Traditionally, direct sales from publishers have experienced poor online operations and executions. The scary thing for Heather and other ad networks is that traditional publishers have started to bring their back-end (operations) in line with their front-end sales growth (online). In short, the publishers are getting better. And, to boot, they know their client’s markets better than broad ad networks. There are now too many ad networks all fighting over publisher’s traffic. Content, my dear friends, is what brings in the audience in the first place. And content is king and always will be. No content or application. No audience. As publishers continue to evolve their operations, the over-saturated ad network market will continue to decline.
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