The Role of Competitive Pricing on the Open Market
Selling merchandise is a complex matter. Especially when you are operating on a commoditized Ad Open Market, where competitive price is such an important criterion for buyers. Failing to properly set the price may cause significant risks for your business. So the questions we explore here are: how should you go about establishing price levels? And, what are the potential risks that you need to anticipate?
The Ad Open Market – a typical marketplace?
The Ad Open Market is a unique marketplace. It differs significantly from all other marketplaces because the merchandise (in this case, ad space) can be delivered instantly from almost any seller (publisher) to any buyer (advertiser). Furthermore, for the majority of campaigns, advertisers target user types rather than particular domains. This means that it doesn’t matter for advertisers whether they buy impressions on the ad space of publisher X, or publisher Y. What matters for them is that they are showing their ad to people in their target group. As long as the seller is not a blacklisted publisher – which means that the seller is not banned from the campaign, because for some reason the advertiser doesn’t want to promote their product on their website, e.g. an air travel company not wanting to show up on a website talking about plane crashes – they are happy to buy an impression and show their ad to the desired user.
Knowing that the Open Market works the way it does, we should think about it as a commodity market. Like on other commodity markets, once two products (in this case, ad requests) offered by two vendors have the same specifications (in this case, ad unit size, viewability, CTR and ad-request user characteristics), they are perceived by the client as being identical. Since on the Open Market there are no factors like high shipping costs, the price should be considered as the primary buying criterion. Nevertheless, price is not the only factor that matters. What is most important is price vs quality ratio. By this, we mean general ad unit quality (its CTR or viewability) matching its price. In other words, lower quality ad units with low CTR and viewability are cheaper to buy than high quality ones
“Are you actively innovating and creating products and solutions with SSP’s as a result of Supply Path Optimization?”
Source: PubMatic
Apart from looking for high quality inventory, buyers are also trying to find a way to deliver campaign KPI’s by reaching the users within their target group at the possible lowest cost. Considering whether they will be able to find the same visitor on two websites, they will push more budgetary funds to that website with a better price/quality ratio and lower eCPMs.
Advertisers’ perspective
Advertisers are aware of these facts. According to a study conducted by Pubmatic among US and UK media buyers, 88% of advertisers are looking for ways to optimise a supply path that will deliver campaigns with the lowest possible budget spend. This has resulted in an increased pressure on publishers, who are struggling to keep their prices at a competitive level in relation to the market and in correspondence to the quality they are offering. This is further emphasised by the fact that impressions are bought by algorithms – robots that don’t tire, and learn very quickly. If they find out where they can buy desired impressions and deliver campaign KPIs at a lowered cost, they will do so without a moment’s hesitation. These algorithms are not attached to any brands or publishing companies; they simply buy inventory in a way that is the most efficient for the buy side. If a publisher doesn’t understand these mechanics and fails to design a pricing strategy that takes the same into account, they may incur three types of revenue-related risks:
- Bid shading risk – occurs when prices are lower than the market level and when good quality inventory is available for a very low price. Once algorithms responsible for buying inventory find out that they can purchase impressions on a particular ad unit for a lower price than they had initially expected, they will lower their bids in order to save campaign budget. As a result, a bid-shaded publishers will lose revenue due to the lowered eCPM, with no changes to the fill rate.
- Limited demand risk – occurs when prices are higher than the market level and when low quality inventory is available for a high price. Since algorithms are responsible for buying inventory encounters, for example, very high floors on a particular ad unit; while they can deliver the campaign on other websites visited by similar users, they will simply move their budgets there. This will result in a drop in fill rate without a commensurate increase in eCPM.
- Inconsistency risk – is a mix of bid shading and limited demand risks, which means that the low quality inventory is actually more expensive than the high quality one. This implies that the publisher has failed to measure what is really important for the buyers and what drives their willingness to pay. The result is that some of their inventory is bid shaded, and some of it faces limited demand; therefore, both fill rate and eCPMs are below potential level.
What should publishers do?
How can a publisher design a coherent pricing strategy that guards against the incurring of these 3 risks? The answer is not easy. The development of an efficient pricing strategy is not a one-off thing – since the market changes very quickly, it requires constant adjustments. Efficient pricing strategy also requires the attainment of market perspective. This is the only way to verify whether inventory is free of the three aforementioned risks, and whether the advertisers can reach a similar audience and deliver campaign KPIs (for example the number of viewable impressions) for a lower or higher cost on our competitors’ websites.
Yieldbird has prepared a dedicated service for those publishers who are either looking to mitigate revenue related risks, or are simply looking for recommendations aimed at ameliorating a given situation. This process is called theOpen Market Pricing Review – feel free to contact us with the aim of finding out more about how we can help you assess whether your website has achieved its full revenue potential, or whether it is encountering revenue-related risks. In either case, we will be happy to recommend a high level mitigation strategy.
Strategy Manager
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