Programmatic Needs More Transparent Pricing

The Sell Sider” is a column written by the sell side of the digital media community.

Today’s column is written by Andrew Casale, president and CEO of Index Exchange.

The programmatic market continues to boom as marketers shift more of their budgets to digital channels. eMarketer predicts 91% of US display ad spending will be executed programmatically next year. That market share is growing even faster in channels like connected TV and mobile. 

Despite the incredible scale of this ecosystem, the market is still maturing in numerous foundational areas. Marketers still struggle to show return on ad spend, leading to inefficient campaigns and making it difficult to quantify the true value of programmatic.

As programmatic matures, we must focus on how we can be more efficient with our existing opportunities. One way to achieve this is to invest in improving price discovery.

Price discovery adds transparency – but it’s missing in digital advertising

Price discovery helps identify where supply and demand meet to determine the price of a given good. It introduces transparency between buyers and sellers so all parties understand the value exchange in a transaction.

Consider an international auction house like Sotheby’s or Christie’s. Before artwork goes to auction, experts estimate the presale price based on dozens of value drivers, including artist, provenance, rarity, materials, dimension, condition and market demand. All parties are privy to this carefully determined valuation. The seller understands the value, while buyers have the guidance they need to place a successful bid, ensuring a fair transaction.

In digital advertising, price discovery not only enables fair and transparent pricing, but also makes for a more efficient and effective market. Media owners can understand the true worth of their inventory, and marketers can understand the value of each impression.

Despite this potential, however, auction dynamics have hindered price discovery. Early transactions centered on the second-price auction model, where the highest bidder paid just one cent more than the second highest bidder. This low-risk model led to overly inflated bids, making it hard to discern the true value of inventory.  

We then shifted to the first-price auction model with the advent of header bidding. With a “pay what you bid” approach, first-price auctions helped bring more transparency and clarity to the value exchange between a media buyer and seller.

But with the solution for one problem came the introduction of another. Because buyers don’t know the actual value of an impression, they tend to bid conservatively. Outside of the obvious impact on publisher CPMs, this has a secondary consequence of increasing the chance that bidders will suffer from lower win rates and simply give up. 

Bringing price discovery to ad tech 

With little pricing transparency between the buy and sell sides in advertising, it’s difficult to assess the accurate value of an impression.

Think of a seller unknowingly sticking a $30 price tag on a Jackson Pollock painting at a yard sale. Without a proper valuation, they might happily accept $30 for the painting and have no idea that they’ve lost out on tens of millions of dollars. While the buyer may have walked away with a valuable prize this one time, the result was due only to sheer luck and is unlikely to occur again. 

There are a few crucial steps our industry can take to solve this problem.

Schain, or SupplyChain object, is an IAB Tech Lab specification for a bid request object that lists the seller IDs of each party that has touched an individual impression. This move toward transparency is progressing to the next level with the widespread increase in availability of tagIDs and global placement IDs that clarify the exact “good” made available. 

The next step is enabling true price discovery and price setting at a level of granularity that reflects true marketplace dynamics. 

A mature, efficient programmatic market relies on accurate price discovery and transparency. The result will be greater ROI for everyone: Marketers can better optimize their campaigns, and media owners can maximize their revenue while continuing to produce high-quality content.

Follow Index Exchange (@IndexExchange) and AdExchanger (@AdExchanger) on Twitter.

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