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Programmatic's legacy pricing structures penalise premium - things have to change

By Cadi Jones |

October 31, 2018 | 6 min read

Over the last 10 years, a lot has changed in the world of programmatic advertising.

Programmatic's pricing structure penalises premium, so it has to evolve

There is a proliferation of fodder around transparency, yet only very few platforms have migrated away from legacy pricing struc / Pixabay

For a start, programmatic trading now represents 80% of UK digital media; a far cry from the days when it was solely defined by the scraps of inventory left over after all direct deals have been made… also know as 'remnant inventory'.

Today, programmatic is used just as often for branding as it is for performance campaigns. And premium publishers and brands, from The Telegraph to The Guardian, Burberry to BMW have adopted these trading practices.

However, very little attention has been given to a big problem that stems from programmatic’s history – for both buyers and sellers, programmatic penalises premium.

How it impact buyers

For buyers, imagine two scenarios: in the first you’re buying an impression at £1 CPM, and in the second, you’re buying at £40 CPM. Both are feasible within the UK market, depending on your segment and the inventory you are interested in.

Let’s assume your demand side platform (DSP) charges you 20% cost of media. When you spend £1 CPM, £0.20 goes to the DSP. To buy exactly the same format in the second scenario, at £40 CPM, you’d be paying £8 to the DSP. For the DSP, there’s absolutely no difference in cost to deliver this service (assuming the formats are the same), meaning premium is penalised.

Simon Harris, head of programmatic activation at iProspect has previously spoken of how programmatic has moved from "a line on a plan, to infrastructure for campaign delivery."

He noted that as the industry has moved towards transacting more expensive inventory, we have seen a number of buy-side platforms offering reduced fees around specific buy types.

As automation is adopted more broadly to encompass channels such as OTT, audio, OOH Harris antianticipates that there will be further tiering/stratification of pricing models and some suppliers moving from a percentage fee to a SaaS model.

And publishers...

In exactly the same way, if a publisher sells its inventory at £1 CPM, assuming a 20% SSP fee, it pays £0.20 to its supply side platform (SSP).

It’s the same cost for the SSP to handle this impression as if a premium publisher were to sell their inventory at £40 CPM, when a full £8 would go to its SSP.

Daniel Spears, programmatic director at The Guardian argues that adtech's percentage fee model represents "a tax on quality" that undermines the interests of brands, buyers and content producers alike.

"As awareness of this market issue becomes widespread over the next 12 months, expect to see tier-one buyers and sellers gravitate towards vendors who operate with a fixed-fee or SaaS model," he added.

The rise of fairness?

While the industry has changed drastically over the last 10 years, the one thing that has yet to evolve is the pricing structure.

There is a proliferation of fodder around transparency, yet only very few platforms have migrated away from legacy pricing structures which are typically shrouded in opaque business practices.

Percentage of media as a pricing structure, incentives the wrong kind of behavior from the vendors that are supposed to be serving you. As a media buyer, you should be snapping up the media that makes that drives business outcomes and that is optimised for performance. As a media seller, you shouldn’t be penalised for the value of their inventory.

So what is price fairness?

From my perspective, it means a pricing structure that is designed to both scale return on ad spend for media buyers while not diminishing margins for those supplying the inventory. It means a transition away from percentage of media and towards pricing for technology and resources. This would be a fair marketplace that enables buyers, sellers, and technology providers to continue to invest in the industry.

Everyone wants value

There are times when charging a percentage of media spend makes sense. For example, if you’re a startup, and new to market, it could be reassuring to know that your fees are pegged exactly to your expenditure.

However, now that programmatic has been a channel for 10 years, and buyers are far more experienced than they were 10 years ago, I’m amazed that there are not more idealists, looking for a fairer approach to pricing.

The future

As more high-value inventory comes to market with publishers adopting header bidding, and especially as more and more of Europe is adopting connected TV, with the higher CPMs that it commands, charging a percentage media becomes increasingly punitive for quality publishers and advertisers who value quality inventory. I look forward to 'disruptive' pricing becoming the new normal, in the hopes that it perpetuates a fairer, cleaner, and more profitable programmatic ecosystem.

Cadi Jones is commercial director EMEA at Beeswax, she tweets @cadielisejones

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