The real value of an ad

Ben Shepherd writes: I love economics – probably because I don’t fully understand it.

I also love the media industry – probably because I don’t fully understand it.

What has been intriuging me of late is the idea of how an advertising or commercial placement is priced. Most importantly, the rationale behind the pricing.

From the media agency perspective, our pricing is pretty simple and reverts back to head hours generally. If you bill a service fee of $x the client has the right and generally will ask you to quantify how you got to that amount. Be it campaign by campaign or in annual negotiations.

So yeah, pricing is scrutinised and it’s based on agreed measures so each stakeholder is, theoretically, comparing apples with apples.

With digital media the one dilemma I often have is trying to work out the value of a placement.

What makes this hard? Surely I should know, right?

Well … maybe not.

I wonder what would happen to the yield and rates achieved by AU’s Free To Air TV networks if tomorrow TV viewers had unrestricted access to another 1,000 channels.

Or the same question if we had 2,000 new, high quality magazines hit the streets … but these were free. Or 100 new FM radio stations.

Where would the pricing go? Who would win out and would it be sustainable?

I don’t have all the answers but I think one of two things would happen.

1/ Pricing would drop
2/ There would be significant pressure to justify value

You could argue that this has already happened to media agencies. A glut of supply has made the market extremely competitive and has put the customer – ie the client – in a fantastic negotiating position and forced agencies to outline all costs and rationalise these. It’s a more for less scenario.

The hypothetical above is kind of like the Internet is now. There are simply too many options. Literally hundreds if not thousands of sites that in a perfect world you would evaluate when looking to solve a clients problems.

Up until recently – even late 2008 – it was considered that if you built a web property which has significant audience volume it would be easy to monetise through display advertising.

The thing is, this implies that the world needs more display advertising. I’m not sure it does … it also implies that display advertising works across all contexts.

There is very little scarcity across all categories online. Supply is everywhere.

There are some exceptions – mainly around SME’s and good, meaty journalism – but aside that not a lot. Automotive and Real Estate somewhat but I would say these are getting weaker as the market matures within each in terms of their knowledge of digital, the consumer, and the research process.

Scarcity is what drives revenue and extraction for ‘traditional’ media … there is a finite amount of spots available for you to interrupt readers/watchers and as a result the market works itself out through supply/demand.

There are only so many spots available during Packed To The Rafters. There are only so many inside front covers in AWW.

Google is the same – but it’s really the only example of true supply/demand pricing online. There’s only so many searches done on International Flights per month and if you want in you need to pay to play.

But imagine Google had an endless supply of every single search term … what would it do to the value of the placement?

Look, Google is a bad example I know … and the reason is another point that needs more thought. It might not matter if Google’s volume was infinite because the ads are always qualified. If someone is searching for a low rate credit card they get ads for low rate credit cards. It’s different to someone researching wealth fund managers and getting low rate credit card ads.

How do you justify a CPM when there are literally 100’s of similar placements available and all are actively approaching the market trying to fill ad spots?

Lets say I am looking for a high net worth individual in a Finance context.

What are my options? Well

– SMH Finance
– Business Spectator
– The Age Finance
– Fairfax Business Media
– The Economist
– Crikey
– CNN Money
– NY Times
– BBC Money
– Bloomberg
– Reuters
– Smart Company
– Finance Asia
– ninemsn Money
– Business
– International Herald Tribune
– Sky News
– Business Times SG
– South China Morning Post

Over 25 choices. All would believe rightly or wrongly they should get a slice of the pie.

Now that’s a reasonably niche example. If you put it a wider context – ie Males aged 18-39 there would a thousand sites. It’s an issue and a real one.

On top of this how do you value placements where a lot of the intangible elements of the value equation are based on old legacies predominantly on the reputation of ‘traditional’ media placements … even if the digital version doesn’t display many of the same elements of quality.

And what is the client or agency buying from the supplier? Is it adspace – a la buying a 30 second TV spot – or are they buying a connection with a consumer?

The two are so different. Yes ‘connection with a consumer’ is pretty fluffy but that’s really what the advertising/communications industry sells and we’re all cogs in that machine.

So – does digital need less supply? Is that an answer? Is the huge amount of choice a negative for the commercial well being of the Internet?

And another question – how many sites that have display media on them should? ie – how many places that accept banners etc are actually good places to plant commercial messages?

Personally I don’t really know. But the questions I think need to be asked and I’m curious to see what peoples thoughts are on the matter.


4 responses to “The real value of an ad

  1. Good read Ben,

    Agencies I deal with always find it hard to justify CPM rates…especially because they are in $US dollars.

    I guess it goes back to – Which site offers the best value to its users through the content they provide?

  2. Couple of musings here – related and not so related.:

    Firstly, love the “what if free to air” question – want to take it one step further…

    Back in the day when trying to convince clients to shift budget off to online (not so hard today!) if a client said to me ‘we are not running online, as the resulting Cost Per Click’ is too high’ – I would ask them if $200,000 per click was too high.

    They would look at me strangely, obviously. Until, I told them that if I owned the ONLY tv in the UK, that could CLICK on their TV advert – I would click just once. No-one else would (could) click.

    $200,000 divided into 1 click = $200,000 effective CPC.

    Now – does that mean, that because no-one else clicks, the BRAND/AWARENESS result of that advert is in any way diminished? Would they stop spending money on TV, because they only had the ‘one’ click?

    Always got me more test budget and the theory holds true today – there is still the resulting brand effect.

    Next, re placement choice: The company I currently work for (AdGent 007) looks after geo-targeted sales for NASDAQ, LA Times Telegraph, Independent, Guardian etc.. so, very topical for me.

    What I have learnt over the years is that brand has several effects on a schedule when in front of a client: a)The client recognizes a key brand, so more likely to sign off on one they understand, even if the indexes for their target are less than an unknown publisher brand. (Next article Ben – where do agencies draw the line on using a brand and allocation, just to get sign off as they know the client reads that publisher?).
    b) The PARENT brand of a site, effects perception of a placement. EG: ninemsn Money versus Economist. Hand on heart, if you put the brand of Economist, next to NineMSN money – which seems to have the higher stature in a consumer’s mind?. WE know that the local up to date content and journalism on NineMSN is more useful to Australian’s than The Economist content. However, NineMSN stretches it’s brand out across messenger, personals, reality TV etc.. (think Virgin Cola) . The brand halo of the Economist stretches out across – just The Economist and Finance and helps to support stature of the brand placed within it, because it is “The Economist”. Are you paying more for that perhaps?

    So – you can attach cost justification to the brand itself. This is why is more expensive that Bloomberg.

    Finally- Share Of Voice/frequency. Chances are, a regular reader of the Economist, will see more of your advert than they would on NineMSN Money, with the same amount of budget. Simply as there are fewer users, competitive advertisers and impressions. Thus, giving you ownership and ‘association stature’ with that brand.

    So much more to dig into here! Keep up these provoking thoughts. Love it.

  3. / agree with some of what Chris mentioned.

    It’s the association with the Economist brand that justifies the spend.

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