It may surprise you to learn that most advertisers paying for programmatic advertising have no idea where their money is going.
Although programmatic offers many ways for advertisers to reach consumers, the fast-emerging field has also created concerns about exactly how brands’ dollars are being spent. With publicly traded ad tech companies such as Rocket Fuel taking margins of more than 50 percent (unbeknownst to most of its clients), cost transparency is becoming a critically important programmatic advertising issue. Marketers need to understand how much of their spending goes toward fees and other costs.
Do the Math
To illustrate, take a fictional company called Complete Shoes. It’s interested in spending $10,000 in programmatic advertising to reach people who are likely to buy a certain type of shoe. Here is how that $10,000 investment might play out in today’s programmatic world.
- First, Complete Shoes reaches out to a large media agency, which charges a commission on all dollars planned and managed. For this example, the media agency charges a flat 10 percent of the media spend, thus reducing the initial $10,000 budget to $9,090. (Because it is a percentage of the media spend, not a percentage of the total budget, you need to divide by 1.1 rather than multiply by .9.)
- The media agency then sends the buy to its holding company’s agency trading desk (ATD). The ATD doesn’t disclose the markup it takes, but in this example, let’s assume that markup to be 40 percent. This reduces Complete Shoes’ media spend further (dividing by 1.4) to $6,493.
- In order to buy the media, the ATD needs to use a technology platform — known as a demand side platform (DSP). A DSP will also take a certain percentage of the media cost. In this example, the DSP takes another 20 percent from that budget, leaving the total media budget at $5,411.
- In order to find the specific audience Complete Shoes wants to target, the ATD uses third-party data providers within the DSP to inform the inventory it should be buying. This is based on the actual consumers who are loading the Web pages where the ads appear. In this case, the data costs for that level of intelligence equate to 25 percent of the media spend. Now our $10,000 budget is down to $4,329, and we still haven’t purchased the media.
- As a technology platform, the DSP does not own any inventory itself. Rather, it uses pipelines built into properties called advertising exchanges. In order to have “seats” on those exchanges to access that inventory, the DSP pays the exchange a fee equal to 10 percent of the media buy, leaving our media budget at $3,935.
- However, that $3,935 doesn’t go directly to the publishers that put inventory on those exchanges. The exchange takes a cut of the publisher’s stake as well as charging the DSPs for seat licenses. Publishers displaying ads from Google’s AdSense receive 68 percent of the revenue recognized by Google in connection with the service, thus leaving the total amount spent directly on media (that went to a website or publisher) at $2,676.
This example doesn’t even account for services that help enhance an ad’s viewability or ensure its brand safety, both of which can also eat into media costs. Ultimately, when an advertiser wants to purchase ads online, it can end up spending 50 percent (or less) on the actual media.
Advice for Marketers
Advertisers must strive for as much cost transparency as possible and take an active role in their programmatic campaigns. This helps guarantee that the money they are paying drives up the value of what they are getting at all steps throughout the process.