Demystifying Exchanges

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stonehenge_small.jpgADOTAS – With so many new exchanges and exchange-like companies coming into existence, there is a tremendous opportunity for new kinds of efficiencies and optimization if marketers can learn how best to take advantage of all these companies.

An exchange is any interactive platform that lets buyers and sellers flexibly get access to partners’ budgets and inventory. These may or may not include automated bidding systems, targeting, real-time pricing or other sophisticated mechanisms. They may just be phone-order-based systems for connecting buyers and sellers.

The biggest exchanges are Yahoo!’s Right Media and Google’s DoubleClick exchange. But other companies offer formal exchange capabilities including Open X, Pubmatic, Rubicon, AdBrite and AppNexus. Each has a slightly different focus, and each has different volumes, capabilities, rules and opportunities for integration.

At their best, exchanges provide a very flexible mechanism for buying and selling inventory online. Direct inventory acquisition (i.e., outside of exchanges) allows for very fine control, long-term relationship management and guaranteed volumes and rates.

But these kinds of relationships can be very slow to set up. For major sites and portals, it may take several months to get started.

On the other hand, with an exchange it is possible to test lots of different kinds of inventory sources very rapidly. With some effort, one can test dozens of new sites in a single day.

This flexibility allows you to quickly test and find new valuable inventory sources. Exchanges also allow advertisers looking for a particular person (e.g. someone who has just visited their site) to look for that person everywhere the exchanges operate — potentially the entire web.

The primary perceived problem is lack of control. Advertisers are scared that by buying on exchanges they lose control of where their ads show up. This can be a major issue for brand-oriented advertisers who demand “brand-safe” sites.

But this concern does not reflect the full array of features available on exchanges – an advertiser always has choice and control. If you don’t want to have your ads show up on unknown or high-risk sites, you can easily prevent that from happening.

On exchanges, knowledge is power. Exchanges can become a very powerful mechanism for reaching exactly the audiences you want on exactly the sites you want — if you watch what you are doing. For advertisers and agencies, the use of exchanges shouldn’t be a yes or no decision for partners, but instead the question should be “How are you going to use exchanges to create value for me?”

Publishers, on the other hand, are concerned that these new kinds of trading mechanisms will turn their sites into commodities — the “pork belly” fear. But this fear is misplaced — publishers do have control. They can leverage these new trading tools to get more value for inventory that they cannot otherwise sell.

Used wisely, exchanges and ad networks can be massive drivers of incremental revenue and help maintain floor pricing for large sites. Unfortunately, this argument has been lost amidst the politicking and grand-standing of some publishers who are using this debate to advance their personal agendas.

So do exchanges create value or suck it out of the market? Well there is certainly the potential for both. All exchanges take a cut of the volume that runs through them.

If used poorly, this cut can become a tax that doesn’t add value to the marketplace over all. However, if used well, all the players can benefit, and the exchange costs can be a perfectly reasonable fee as part of this transaction.

Five things to think about when using exchanges:

  1. Testing. As in all forms of marketing, you have to be prepared to test the heck out of exchanges. Setting prices, frequency caps, volume limits and so forth takes a lot of trial and error before your team will really understand what are the right settings for each campaign. And of course, each campaign will be different.
  2. Know your target. In the rush to try new things marketers can forget this basic, obvious tenet. The better you understand your target audience, the better you can leverage exchanges. They provide tremendous flexibility in terms of targeting, channel and the ability to connect external data sources to your ad campaign.
  3. Understand the value of your data. This is perhaps the hardest technical problem with exchanges. All your experience in setting prices, caps and so forth, as well as understanding the value of your data partners’ products, takes discipline and careful measurement. It is very easy to try stuff out, but harder to learn from the experience. And harder still to have your campaign learn on the fly. The exchanges cannot solve this problem – you have to manage this yourself.
  4. Develop good relationships with your publishers, ad networks and data providers. All these new tools don’t disrupt old fashioned partner development. You still have to take time to build good working relationships with all the other members of this value chain. Understand your partners, their needs and interests, and you will be able to drive your own business more effectively.
  5. Find a good exchange expert. Some of the newest generation of ad networks are emerging as exchange experts. This expertise is based on more than just experience – it means they’re building integrations with many or all of the exchanges so that it is possible to more easily manage campaigns in such a complex environment. Finding a good partner that you can work with is crucial — in many ways this marketplace resembles the emerging SEM space in the early days of search as experts start to build scalable practices to support buyers.

How many exchanges should you use? This is where the serious marketers are separated from those with insufficient budgets or expertise.

The right answer is “all of them,” but building the infrastructure, team, operations and processes to do so is a major challenge. Ultimately, being able to buy efficiently across as many sites as possible, and in a marketplace as fluid as a possible, will give you competitive advantage.

This comes back to the previous question — finding a partner to help you will increase your chances of success.

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