Ad Tech’s Got a Business Model Problem

It is true. All of the point solutions confuse the market, and graft abounds. But the biggest problem in digital advertising is broken economics — and only marketers themselves can fix this.

It’s convenient to push the blame for digital advertising’s ills onto the supply side, and certainly publishers need to be accountable. But for many of the biggest sources of waste in digital advertising today – from bot traffic to frequency overload – advertisers are the only ones capable of enforcing rules across all publisher and inventory sources.

Unfortunately, flawed ad tech business models mean these problems often go unaddressed as eliminating waste takes a backseat to spending the entire ad budget. And blame rolls downhill, falling to the publisher, who is in fact least capable of fixing the problem.

The universal reality today — that ad technology is priced as percentage of media or a CPM – is the root cause of many of the ills plaguing digital advertising. Partners have no incentive to block bots, improve viewability or manage true frequency among many other things that all add up to waste up to 80 percent of a marketer’s total digital advertising budget. The tools needed to dramatically reduce digital waste are available to marketers today. Unfortunately for marketers, media-based pricing models mean DSPs, trading desks, networks and publishers have no incentive to cut the waste that lines their pockets

So what’s this look like in practice? It takes the form of partners who use viewability as a post-campaign “KPI,” while never optimizing campaigns to it for fear of a 40 percent or greater drop in impressions (and thus revenue). It also takes the form of bad frequency management, where a handful of bots often eat up over a quarter of a campaign’s impressions. All these problems are fixable with the right incentives, but media-based pricing means advertisers are paying more than ever for technology, but rarely reaping the efficiency benefits.

No other part of a marketer’s organization pays for technology this way. IT, finance, HR, supply chain, et al., have long figured out that paying for value – not volume or effort – is best. There’s a reason companies from Salesforce to IBM have adopted more flat SaaS licensing fees for their software: they create better results for clients and use technology to maximize client – not vendor – yield. In ad tech, a SaaS pricing model means marketers can maximize ROI with integrated budgeting and buying that is not beholden to the inefficiency wrought by percentage-of-media pricing.

So how can marketers break out of this flawed model? It starts with demanding transparency and accountability. Instead of working under a paradigm of blind trust, marketers need to ask hard, basic questions of partners, like, how much are we spending, where is it going and why is it going there?

But the real solution requires marketers to adopt a new technology framework. Marketers need to allocate resources upfront and explicitly to technology that reduces waste and inefficiencies, not continue to bury tech fees in media buys. Marketers should work with their CIO to create a tech-vetting process that favors integration over point solutions. And most important, marketers should require incentives that align with their best interests.