Why Ad Tech Is Harder Than The Pizza Business

stevegoldbergfixed“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Steve Goldberg, senior adviser at EmpiricalMedia.

A recent blog post written by Seth Sternberg, one of the founders of Meebo, postulated that ad-tech businesses are exceptionally hard to run. In a related post, Eric Franchi, founder of the ad network Undertone, asks if ad tech was any harder than owning a pizza joint.

So, what is the truth? Is it harder to own a place called Pepone’s in Greenpoint, Brooklyn, than it is to start an ad-tech company in SoHo?

Let’s take a closer look.

First and most importantly, overcapitalization in ad tech is real and leads to numerous, sometimes foolish and irresponsible competitors. Try borrowing money to open a pizza joint across the street from another pizza joint. It can be done. But if that first pizza place has amazing Yelp reviews, great price value and loyal customers, it is pretty hard to get a loan – even if you literally have a secret sauce.

But go to a VC and explain you want to be a new DMP entrant. That money would somehow be easier to get. The reason may be related to greater risk seeking higher return, but honestly, there is just way too much capital out there.

This is made worse by the fact that pizza is an “or” business and ad tech is an “and” business. “And” businesses are simply tougher than “or” businesses.

I love my local pizza joint. Love it. After I eat my three slices, I’m full. And I’m not going to a competitor. “Or” is tougher to trial but builds retention and loyalty.

“And” businesses like ad tech engender trials with new competitors. In fact, it celebrates them. It splits the pool of available “pizza money.”

Then there is the nature of the “buy decision.” People buy pizza because they are hungry, or sometimes, because they are drunk. What goes into the pizza-buying decision? Am I hungry? Do I want pizza? Is there pizza? Can I afford pizza? That’s about it.

If ad tech were pizza, the buying decision would probably also include some extra stuff. Does buying pizza make me look smart? Did my friend buy a pizza? Does my boss like pizza? Does my boss understand pizza? Do I need a mani-pedi? Can I taste the pizza before buying it? Can I get the first slice free? Can they change the pizza toppings just for me? The list goes on and on.

In all deference to the hot and sweaty paddle work at the oven, dealing with media planners hungry after a night of drinking in Murray Hill is actually not as hard as dealing with them at the Wednesday Lunch and Learn.

Market confusion also adds to the problem. Pizza places sell pizza. Bookstores sell books. Furthermore, customers of pizza places do not expect to receive books while waiting for a slice, and book shoppers do not expect toppings on a new novel. But in ad tech that’s often what happens when pitching your product. You do a “thing” but people think you do a different “thing.” Or, your competitors can convince customers that you do not sell pizza but rather books, and despite the aroma in the shop, those customers believe it.

And finally, there is “the pivot.” If a coffee store opens next to your pizza place and does badly, they might try a bunch of things to survive, such as adding tea to the menu or dropping prices before they close up shop. What don’t they do? They will not “pivot” into being a pizza shop. They do not go back to their investors and raise even more money to buy pizza ovens. Pizza places never wake up and find the coffee shop next door has pivoted to pizza. And they do not have competitors who simply decide to be a pizza place and issue a press release saying that they are now a pizza place even before they buy the ovens.

In ad tech, a pivoting competitor is just another day at the office.

So there it is. Pizza places are hot and sweaty and dirty. The margins are thin as a great N.Y. crust, and getting thinner as the price of cheese goes up. The hours are long.

It’s hard.

But ad tech — that’s a tougher way to bring home the dough.

You can follow Steve Goldberg (@stevegol) and AdExchanger (@adexchanger) on Twitter.

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