Transparency is the new black box

by Patrizio Spagnoletto, CMO, SteelHouse

Not many drivers understand the inner workings of a diesel engine. Fuel goes in, horsepower comes out and you get where you need to go. But in the case of Volkswagen’s rigged autos, the company quickly learned that people care about a lot more than just performance. As a result of modifying their engines to cheat on diesel-emissions tests, U.S. sales dropped almost 25 percent immediately following the scandal.

The same can be applied to the advertising industry. Marketers have learned that just because they’re getting the performance they expect, it doesn’t mean they should be forced to ignore how it’s being achieved. Enter one of the industry’s hottest topics for debate: transparency.

So why do marketers stick with black-box advertising solutions when providers are playing it fast and loose with their clients’ budget? Former Mediacom CEO Jon Mandel last year admitted that media kickbacks are rife industrywide. While leading executives denied his claim, Mandel confirmed the suspicion held by many — that ad agencies have been profiting off of arbitrage for some time.

The resulting furor has been tinged with a certain amount of helplessness. That’s because marketers depend on technology to deliver their digital campaigns, and they need a laundry list of partners to do it. Indeed, according to the Boston Consulting Group, advertisers can work with up to 20 intermediaries just to produce and run a single digital ad. Opacity from partners only compounds the layers of possible trickery.

And yet digital marketing isn’t going away. The industry’s biggest trade groups know this better than anyone. So, to help ease advertisers’ nerves, the American Association of Advertising Agencies (4As) and the Association of National Advertisers (ANA) created a joint task force last year to identify best practices for transparency in areas like planning and buying media.

Tellingly, the organizations haven’t been able to reach consensus, and frustration is mounting. Why? It all goes back to the bottom line: A lack of transparency is leading to real fiscal and operational losses.

Here’s how it breaks down: Traditionally, digital advertising platforms make money by marking media up somewhere between 40 percent and 60 percent. So, let’s say you bid a $3.50 CPM. As little as $1.18 of that could be going toward the actual media, but how would you know? It’s typical for the markup to be added by the exchanges, networks, and DSPs in the ad-buying chain. What’s more, when a high margin is carved out of a bid price, it limits the amount of inventory available for bidding. And if less money is being spent on actual media, the amount of available inventory shrinks, and that could be costing marketers valuable customers.

Meanwhile, marketing budgets take a hit — and it gets worse. Since black-box solutions use proprietary algorithms that providers can’t explain, you don’t know which metrics are being tracked. Who’s viewing your ads? Where are they being served? And, most importantly, why?

What’s an advertiser to do? Marketers don’t have the right to demand no mark-up — businesses have to stay profitable — but they do have a right to know what that mark-up is. It’s otherwise impossible to make informed choices when you don’t know where your money is going.

That’s why marketers need to demand a partner who understands why transparency is important. When you know where your dollars are going, you can be more targeted. By knowing what percentage of your budget goes to your media buys, you can control where and how much of those dollars will go to each media buy.

Knowledge leads to control, and control leads to performance. In the end, you’ll have optimized your media performance.