As ad tech consolidates, business models shift

Ad tech has been historically priced as a percentage of media, or a CPM model. This made sense for brands and agencies because they got used to purchasing ads based on awareness from TV, radio and print. But with ad fraud running wild and bot traffic wasting the industry billions of dollars, ad tech has to move from media-based pricing models to a performance-based or flat-fee model.

“CPM doesn’t capture all the extra goodness that digital is able to produce,” said Adam Cohen-Aslatei, senior director of marketing at marketing consulting firm Jun Group. “Brands increasingly pay for performance like cost per action, as well as include opt-in and non-interruptive units as part of their media mix.”

Going forward, ad tech will need to become more like marketing tech, which has largely adopted a software-as-service model to extract the technology fees and reveal the real media price, according to to Victor Wong, CEO of programmatic creative platform Thunder.

“Media arbitrage cannot be a long-term solution, and it ultimately provides not enough value to people,” he said. “It can only keep happening until the markets recognize the mismatch in pricing and close it. The industry will need to learn to transform inputs to new goods.”

Focus on outcomes
Ad tech is going through consolidation, but it’s only a midlife crisis for companies that rely on soft metrics like impressions and views. Ad tech has to be tied to harder metrics like sales and credit-card sign-ups that demonstrate user engagement and business results, said Erik Mikisch, vp of marketing for ad tech firm Performance Horizon.

A focus on performance has proven effective for fast-growing ad tech companies like Criteo and MediaMath. The former uses a CPC model but optimizes conversions — clients get $14 in sales for every dollar spent, according to the company. While the latter adopts an incremental return on ad spend metric that compares ad spend to actual revenue (or even better, to gross profit).

Return on ad spend “is the purest marketing metric: Most click-focused vendors price on CPC that is not necessarily linked to actual revenue — people click on an ad, but never buy,” said Dan Rosenberg, svp of MediaMath. “Meanwhile, CPC is easy to fake. Bots can simulate clicks, but they can’t simulate actual cash payments.”

In mobile, the cost-per-action business model, where the advertiser pays the publisher for desired action, can work well, according to Amanda Mehtala, head of marketing and communications at mobile ad tech company BidMotion. CPA metrics could be cost per first ride for a taxi-hailing app, cost per booking for travel apps or revenue-share model for an e-commerce site.

“We believe this value-driven business model to be the future of ad tech, as mobile marketers become increasingly self-aware of the need to step away from a volume-focused metric and properly measure return on ad spend,” said Mehtala.

Ad tech companies are embracing a SaaS model
Inventory-based pricing models aside, media arbitrage can be hidden in technology fees. The first set of ad tech companies — including Millennial Media, Yume and RocketFuel — are on ad network or media arbitrage models where there’s limited visibility or predictability of forward revenue, which results in their being poor public companies, explained Rajeev Goel, CEO of marketing automation software PubMatic.

But increasingly, ad tech platforms are moving away from the arbitrage model. In order to make the cost of technology visible to the clients rather than hidden in the margins, companies like Rubicon, Trade Desk and MediaMath have adopted a software as a service model.

“SaaS could lead to more transparency on the market where advertisers see how much the technology fees are and commissions by intermediaries, rather than seeing the end media or data cost that has everything factored in,” said Maciej Zawadzinski, CEO of ad tech development company Clearcode.

Conversations with executives show that SaaS is where ad tech is headed not only because it can provide more transparency, but also because venture capitalists are more interested in the recurring revenue than ad operations service revenue. While many have been growing with a SaaS model, companies like Turn have stumbled upon this framework. One major challenge with SaaS is that marketers usually set marketing budgets on a campaign-by-campaign basis, so they don’t have additional money to license a technology.

“Since enterprise software is still relatively new for CMOs, we structure pricing in a way that is more familiar and aligned with marketing budgets,” said MediaMath’s Rosenberg. “CIOs and CTOs have spent decades allocating budgets based on the SaaS pricing model, so it’s familiar to them.”

It will take a long time for agencies and brands to adjust to this model. The problem is if only a small part of the ecosystem charges the technology subscription fee while the rest is still media-based priced, marketers will still have a dysfunctional ecosystem with no incentive to cut down the waste or fraud, said Clearcode’s Zawadzinski.