Today’s column is written by Jordan Mitchell, vice president of product at Rubicon Project.
The concept of "holistic yield management" is in the front of many publishers' minds right now. It allows RTB demand to compete with a publisher's direct sold campaigns. The conventional thinking: By aggregating all demand within a single, unified auction, and awarding each impression to the "highest bid," a publisher makes the most money.
Well, it's the wrong approach. Awarding each impression to the highest bidder, without considering scarcity, does not make the publisher the most money.
Yield management is the process of understanding, anticipating and influencing demand in order to maximize yield or profits from a fixed, perishable resource. It's not just holding an auction and allowing price to be the sole determinant. Since the airline industry gave yield management its name, it may help to use airline seats as a parallel.
Masters Of Yield Management
Airline seats are a lot like ad impressions. The seller and the buyer value each seat differently based on factors such as time of day, destination and distance, when the seat was purchased and whether it's for business or personal travel. Airlines use multiple sales channels, and very carefully segment their customers to apply price discrimination; very few seats on the same flight are sold for the same amount.
But here's the difference. Airlines are very careful to allocate inventory to different buyers and channels at different prices, using probability models to evaluate scarcity. As a simple example, this is why they provide free first class upgrades. They've determined that the probability of selling another $300 seat in coach is
Translating Yield Management To Ad Impressions
In contrast, most ad servers don't consider scarcity at all in their decisions to allocate inventory to channels and buyers. Instead, they typically use a "waterfall" method of decisioning, whereby they first consider delivery schedules for direct sold campaigns, to ensure even pacing, with the remaining unfilled impressions allocated to buyers based on the highest CPM or bid. And in some cases, ad servers allow indirect buyers to compete with direct buyers on the basis of bid CPM. In other words, ad servers make optimal decisions at an impression level, which are suboptimal for overall revenue.
How is this suboptimal for overall revenue? They routinely forego scarce, high-value RTB demand in favor of direct sold campaigns, which could have been served to the next visitor. For example, if two people visit your website at the same time, when you as a publisher are 50% sold through, one of those users will be served the direct sold campaign and the other will be sent to the indirect channel. They're both worth $15 to the direct advertiser, although visitor A is worth $10 in the RTB marketplace while visitor B is only worth $1.
The publisher's ad server usually doesn't know how much each visitor is worth within the indirect channel, when considering its decision on whom to serve the direct sold campaign to. Even if it did, $15 still beats $10 and a standard auction – awarding the impression to the highest bid – would still result in the wrong decision, which is to serve the direct sold campaign to high-value visitor A and send visitor B to the indirect channel. The right decision is to send high-value visitor A to the indirect channel and serve the direct sold campaign to visitor B because it means the publisher earns $25 instead of $16.
To make that right decision, the ad server must recognize that a $10 impression is scarce within the indirect channel, and the publisher should take advantage of every one of those opportunities.
Awarding each impression to the highest bidder, without considering scarcity, optimizes your revenue for only that impression. It does not maximize your revenue overall.
Do's And Don'ts
Publishers should not allow ad-serving decisions to be based on price alone, or "schedule" alone. Rather, publishers need to consider all factors, including price, schedule and scarcity of supply and demand. Publishers generate the most revenue by sending scarce, high-value RTB impressions to their indirect channel, with the rest served by their direct channel, even if the RTB clearing price does not exceed the direct sold CPM.
Now many of you publishers may be asking yourselves: "If I bias the scarce, highest-value impressions within RTB to be fulfilled by RTB, doesn't that affect the performance or delivery objectives of my direct sold campaigns?"
The answer is no.
As for delivery, the core of ad server decisioning has always been around maintaining the pacing and delivery objectives of direct sold campaigns. When campaigns are "behind schedule," ad servers automatically adjust the priority until campaign delivery is pacing on schedule. That said, publisher judgment is still important in balancing RTB delivery and prioritization with direct sold campaign delivery and prioritization.
As for performance, it's important to note that direct buyers have different objectives and value inventory differently compared to real-time buyers. All buyers aren't chasing the same minute audience segment.
Direct buyers buy for audience reach and performance. Real-time buyers are often looking for very specific impressions and users, as well as the ability to only bid when they see something they like, allowing them precision, scale and performance. If you as a publisher accept click-through rate (CTR) as a proxy for performance, then consider this: Multiple analyses have demonstrated no correlation between CTR and the most important factors driving RTB bid value.
In other words, a holistic yield-management strategy that intelligently allocates impressions to the best sales channel does not affect performance of direct sold campaigns. Everyone wins.
Publisher sales channels continue to evolve as automation increases between buyers and sellers. As a result, many are considering the benefits of holistic yield management. The conventional approach offered by vendors today involves aggregating direct and indirect demand into a single system, with the impression being awarded to the highest bid.
The "highest bid wins" approach, unless it considers scarcity, does not provide publishers with optimal revenue. All buyers value inventory differently, and the scarcity of supply and demand must be considered in each decision to optimally allocate an impression to a sales channel.
Publishers that are willing to make suboptimal decisions on an impression-level basis can achieve optimal overall revenue.
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