Greg Hills

I had a thought-provoking client conversation earlier this week. As the client increased spend for their display campaign with my company, we mentioned that the eCPM for ad exchange inventory would increase slightly. They asked an interesting question: “Shouldn’t it be cheaper if I buy more?”

We’re all used to getting volume discounts. When I supersize my meal at McDonald’s, buy toilet paper at Costco, or buy two bars of soap to get one free at CVS, I’m decreasing my unit cost by buying more. Retailers include volume discounts in their pricing structures when they can increase profits by selling more units, despite the lower unit price.

Volume discounts are prevalent in media buying. Publishers often lower the CPM, or unit price, below the “rate card” for big agencies that spend a lot. Big agencies turbocharge this volume discount. They leverage the collective spend of their entire client base in upfront publisher negotiations, achieving lower rates which are then passed on to the individual clients. Big brands, in turn, leverage their own scale in fee negotiations with agencies. Everywhere you go in the traditional media world, bigger spend equals cheaper rates. So it seems totally backwards to pay higher CPMs when buying more media. What kind of incentive is that after all?

Here’s the important point revealed by my client conversation: A huge, underrecognized shift occurs when advertisers and agencies begin buying media from markets, such as ad exchanges, as opposed to media retailers, i.e. publishers. In a market, prices are determined by the intersection of supply and demand and, all else being equal, price goes up as you buy more. Those familiar volume discounts go away.

These pricing dynamics are familiar to search buyers, since search prices are determined by market mechanisms. Google designs the market for selling their search listings, but they don’t set the CPC price themselves. Nonetheless for anyone used to buying media from publishers instead of markets, paying a higher rate when buying more still feels kind of weird.

I’d like to make two high level observations on how media markets change the agency business:

1) The shift to media markets and away from media retailers is a democratizing force for the buy side. If the big guy doesn’t get a price break, it makes it easier for the little guy to beat the big guy at serving advertisers. When the market paradigm is dominant, like in search, talent and technology will win every time regardless of who is the biggest.

2) The media market paradigm advances the client-agency conversation from a discussion about media to a discussion about the client’s true business goals. When the media agency stops talking about delivering good media prices ( “Through volume discounts, our agency delivered $20mm in cost savings to your business this year.”) they have more time to talk about delivering customers to the client (”Through smart targeting and bidding on the $100mm of media we bought, we delivered new customers representing an estimated $400mm in lifetime value to your business). Once this more strategic conversation becomes the norm, and advertising is discussed as a business driver instead of a cost center, agencies and clients will both be better off.

Tagged: buy-side, exchanges, markets, yield-optimization