Why Advertising Through RTB Needs a New Buying Model

Focus on Value, Not Cost

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For decades, cost per thousand (CPM) pricing has controlled how nearly all advertising is bought and sold and how different media properties are compared. While a focus on CPM-based buying also provided a foundation for the first decade of online display growth, it is now preventing the online advertising industry from realizing the full potential of what may be one of its biggest game changers—real-time bidding (RTB).

In the CPM-based model, the seller typically promises to deliver a certain number of impressions within a set time for a fixed cost. This aggregate approach naturally leads the buyer to focus on lowering the CPM during negotiations, since the campaign's overall effectiveness will improve in direct proportion. For example, if an airline advertiser looking to drive online ticket sales negotiates its up-front CPM cost down from $10 to $5 while ultimately generating the same amount of revenue from the campaign, the overall effectiveness of its buy has doubled.

This approach contrasts sharply with an RTB campaign where, rather than buying a block of impressions in aggregate, the advertiser buys only the impressions it wants at a unique price determined for each individual impression. Now, ads aimed at potential airline ticket buyers can be priced on an impression-by-impression basis, rather than priced up front at an aggregate CPM of $5.

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This fact dramatically shifts the relationship between the campaign's CPM cost and its value, typically expressed as a cost per action (CPA). In fact, in some cases the advertiser may decide to raise its CPM for certain impressions. At first glance, this may not seem logical. How is it possible to pay more and still come out on top?

In RTB, each impression has both a unique value and a unique cost. Some consumers are more likely than others to purchase certain products, different advertising placements will have varying degrees of influence over consumers, and certain advertising may have differing effectiveness at varying days and times. That makes some impressions more valuable than others. For example, an executive who urgently needs to purchase a premium airline ticket to a conference in Las Vegas is likely a far more valuable prospect than someone casually browsing for a cut-rate Vegas weekend getaway. To our airline advertiser, an impression delivered to the executive is likely worth far more than an impression delivered to the leisure traveler.

We have seen this principle demonstrated across thousands of campaigns within all industry verticals. In some cases, higher-priced impressions have been 100 times more effective at influencing consumer behavior. Of course, this doesn't mean a buyer should simply pay a higher CPM. Rather, media buyers should shift their focus from cost to value. Too many RTB buyers focus on cost, set a CPM cap on their bids, and then miss many valuable impressions that could deliver a strong CPA.

Performance advertisers often evaluate campaigns on an effective cost per action (eCPA) basis by weighing their media spend against the total actions attributed to the buy. But for many advertisers with a clear performance goal, shifting fully to CPA-based buying should generate better results than CPM-based buying. When the desired outcome can be clearly measured and fairly attributed, buying by CPA simplifies the transaction and enables the advertiser to take full advantage of the dynamics of a real-time marketplace. Easy, right?

There are several challenges preventing RTB buyers from capitalizing on the value-based buying opportunity today:

It demands a mind-set shift from the media-buying community. A CPA-based relationship requires honest and open collaboration between buyers and sellers to set goals that are genuine and achievable. Traditionally, CPM-focused relationships involve the typical posturing, hidden information, and talking at cross-purposes that occur in any zero-sum negotiation, where one side's gain is the other side's loss.

Value-based buying requires accurate insight into the actual value delivered by each seller. Buyers must invest in both the technology platforms and the attribution models to better account for the chain of events that leads to a sale. Most marketers can say which media partner delivered the "last view" or "last click" before a sale—but not all can tell who first brought that prospect to the site, or how influential a given ad was in causing the successful outcome.

Understanding the value of each impression and acting on it in milliseconds is hard. It requires large volumes of data, the algorithms and processing power to make sense of that data, and a platform with the scale to apply those models to billions of buying decisions every day. In short, buyers should choose a display partner with the proven ability to drive real results at scale.

Important changes are seldom smooth and easy. RTB presents a huge opportunity for buyers to "take it to the next level" for their clients. With an open focus on value, buyers can evolve from haggling over costs to working collaboratively with media partners to find the strategic value and ROI they are both committed to delivering.

Konrad Feldman is the CEO of Quantcast. His latest white paper on this topic can be found here.
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