Today’s column is written by Alex Magnin, chief revenue officer and partner at The Thought & Expression Co.
For publishers, it’s obvious that direct sales generate the highest cost per thousand impressions (CPMs).
It’s so obvious that we don’t have to think about it. Of course we get the highest rates when we sell an advertiser on the value of our site and guarantee their share of voice, placements and targeting. And of course we pay our salespeople handsomely because what they do is so valuable.
But how valuable is it exactly? Many publishers don’t know. Yet we’re in a world where programmatic media accounts for more than half of display ad spending, and we measure that programmatic yield devoutly.
The equation at first blush seems simple – plug those sweet direct sale CPMs into a yield model – but it becomes more complicated on further examination. The beauty of programmatic advertising, which is underappreciated as publishers fret declining prices, is that the cost of sales is near zero. With programmatic, gone is the expensive direct sales team and myriad variable costs associated with a deal.
Some companies, like Demand Media, are already choosing to take advantage of this math, betting that replacing expensive direct sales teams with a few highly trained yield-operations and product people will pay off on the bottom line. This is not the right choice for every company, but it may warrant future consideration and force some to justify why they even have a direct sales team vs. why they don’t.
Critical Parts Of The Equation
Properly measuring direct sales yield requires two things: an accurate reckoning of fixed and variable costs, and an understanding of the “replacement value” alternatives that programmatic provides.
Fixed costs include the salaries and benefits of a team, the overhead of their wing of the office, travel and entertainment. Variable costs of a deal include commission payments, design expenses, marketing or social media spending and any resources drawn from across the company that otherwise would be allocated to a different productive purpose. Replacement value is whatever would have been done had the direct sales deal not been sold; basically, it’s the non-guaranteed CPM of the banner that’s now being replaced by the direct sales CPM.
In a very simple example, a seller brings in a $50,000 deal for rotation on the home page leaderboard at an $8 CPM. Usually, this placement would fetch a $2.50 CPM from the exchanges. The deal represents 5% of the seller’s goal; the seller’s base compensation is $100,000 with an effective 5% commission. Amortize that fixed cost across the deal, consider the variable of the commission and the $50,000 turns into $42,500 for those 6.25 million impressions that were sold. Those impressions, if unsold, would have made $15,625 through the exchanges. So, the true “value created” by this $50,000 deal – the value that fuels your business – comes to $26,000 and change, or a $4.30 “CPM created.”
Repeat the same exercise factoring in the support team, overhead, the variations of programmatic CPMs by placement, time and user, alongside all the miscellaneous and oft-unspoken costs that go along with direct sales deals, and the calculation becomes quite complicated. Perhaps certain direct deals are not worth it at all.
Now, none of this is to say that operating a direct sales team is a bad choice. A 50% or greater “true value” operating margin on your direct sales team is nothing to sneeze at. That additional $26,000 might be exactly what keeps a business afloat or might fuel investment in the future or represent profit margin. But for planning and strategy purposes, in a world where selling inventory, at least at some price, has become free, publishers with direct sales teams must fully understand what they are doing and why.
What makes this so interesting and important today is that the notion of what direct sellers sell has expanded rapidly. Where a direct sales team used to sell the banners on the site, now they lead content creation deals, conceptualize big ideas and bring technological expertise to the table. Where a seller used to sell against the general value of the property, now they sell the general value of the property and what we’re going to build from it to create value for the client.
The digital media sellers of the future will look much more like all-hats creative, technology and strategy ninjas than the bag-and-media-kit carriers of the past. Understanding direct sales yield in a world of custom units, branded content creation, microsite builds, influencer contracts, social media spending, data buys and technology integrations will be harder than ever.
But it is also more important than ever, because in it is the difference between a prosperous new media company and one stuck in the past.