Michael Katz wrote an opinion piece for Adotas critiquing an auction marketplace for advertising and recommending an open CPA marketplace as a better solution. Everyone is entitled to their opinion of course, but as someone heavily involved in an auction ad marketplace with Yield Manager, I’d like to discuss a few of his comments.
The auction-based model is an incomplete solution though; a truly efficient system exists only when there is an open marketplace based on pay for performance.
First, I don’t think he ever really proves in the entire article why an open network based on performance is truly more efficient.  Second, I don’t think it’s really true. Pay for performance has some great advantages, but it also isn’t always the best solution for publishers. They’re the ones taking all the risk in a 100% pay for performance scenario.
The only people enjoying the efficiency of this program are the owners of the network, though. The advertiser has spent more than they needed to on traffic that did nothing but increase their overall spend and probably did not spend enough in the places where they should have to increase the delivery of highly converting traffic.
How does an advertiser find out what sites will convert without testing all the sites in the network? I don’t see how it’s possible to ONLY spend money where the traffic converts as Mr. Katz suggests. Once the system does find where traffic is converting, it spends as much as possible there.
The publisher, similarly, potentially missed out on a higher yielding ad.
No, the way an auction works is the publisher gets the ad that will pay the most for that impression. That is the highest yielding ad.
By utilizing an open network, advertisers see exactly which publishers comprise the network, view performance by site placement and can adjust bids on a site specific basis to ensure that no impressions are wasted.
I am a fan of open network concepts, don’t get me wrong. However, I also know that the majority of advertisers don’t have the time or knowledge to do this themselves as effectively as an automated system. Advertisers are people, which means they get busy, or they have biases that may cause them to do funny things when manually adjusting bids.
As an advertiser, if you could see that a handful of sites are providing most of the return on your investment but you are not getting all of their traffic, wouldn’t you want to re-allocate the dollars you are spending on low performing sites and pay a slightly higher rate to ensure you are maximizing the high performing placements?
Paying more to get all of a publisher’s traffic isn’t necessarily a good idea. It could work well, but increasing the frequency of your ads on their site might not lead to the same ROI you’re currently getting. As you spend more and more, you may get less ROI out of each impression. Regarding spending money on low-performing sites, because of the way Yield Manager works sites that don’t perform don’t earn much because they aren’t performing. This means advertisers are not spending a lot of money to get volume on these sites, if they end up still serving to those sites at all.
Finally, the network diversifies its risk by running a higher number of more profitable campaigns instead of relying on a handful of advertisers to make up 90% of their revenue.
I don’t see the direct relationship between allowing advertisers to manually adjust their bids per site to a higher number of more profitable campaigns showing up. I think that’s an assumption that advertisers would just come out of the woodwork if the model was changed.
The problem is that at the end of the day, a CPM deal offers almost as much risk without the upside of a CPA deal though. If the traffic is not converting, the advertiser will cancel and most of the time its with 24 or 48 hours. If you want to retain them as an advertiser, you will have to provide some sort of make good, lower the rate, or possibly even switch to a CPA model. In any event, the advertiser now has the negotiating leverage.
The dynamic CPM pricing type advertisers can use in Yield Manager solves this problem well. The upside for the publisher still exists, if their traffic converts well advertisers will automatically bid higher to get access to their inventory. It also mitigates their risk, because they aren’t giving away all their volume to CPA campaigns hoping that they’ll convert at some point. Mr. Katz says that in a CPM or CPC model the advertiser ends up with the leverage. However, I”d argue that in a CPA model, they also have the leverage as they have no risk.
In summary, by taking on a higher quantity of advertisers and matching the best performing ads with the best performing sites in an open market on a pay for performance basis, the network achieves three results. First, publishers make more because the advertiser allocates more money to the quality sites to ensure more traffic.
A good auction system does that automatically. Advertiser money IS allocated more towards quality sites.
Secondly, the advertiser maximizes the utilization and efficiency of its spend because it is paying more to high performing publishers who will now allocate more impressions on a macro level to the network and on a micro level to that advertiser.
Again, this already happens. In a good auction marketplace, the advertiser does pay more to higher performing publishers.
Lastly, the network diversifies its risk and builds relationships with advertisers and publisher by showing it is committed to providing the best and most efficient results possible.
This could be accomplished just as easily by just saying a network should take on more advertisers. An auction marketplace is committed to providing efficiency and the best results possible.
I like open markets, I’d like to see more auction marketplaces go that direction. I’m just not sure pay for performance only is the solution, or that auction markets need to be bashed to promote the idea of an open market. And why can’t an auction marketplace be open as well?