Understanding Programmatic Digital Ad Buying

Digital advertising used to be purchased and sold 100% manually. Those with ads to sell, such as Yahoo! and MSN, would pitch their content and associated ad inventory and targeting solutions to advertisers and agencies. It worked in the other direction as well. Agencies and advertisers would put our RFPs requesting access to certain audiences in certain contexts.

As ad networks and the alphabet soup of associated and emerging platforms such as DSPs, SSPs and RTB systems developed, programmatic buying has become more commonplace.

One of the best summaries on the topic of programmatic ad buys comes from a white paper from Rocket Fuel, one of the most rapidly growing providers in this space. I encourage you to download a copy of it to get their perspective.

The Stock Market Analogy

The best way to explain how this all works is to think of the stock market. Stocks used to be bought and sold by calling a broker and providing a minimum price at which you’d be willing to sell a certain number of shares of a specific stock or with a maximum price you’d be willing to buy a certain number of shares. Those minimums, maximums and quantities used to be subjectively chosen by humans, for the most part. However, economists and mathematical scientists have studied the stock market to come up with more optimal ways to select these figures and programmatic stock exchange systems were developed in which overall goals are input and algorithms optimize the rest.

Similarly and not coincidentally, the digital ad world has developed ad exchanges. There have been a number of articles written about these exchanges and programmatic buying. In a nutshell, these are marketplaces in which ads are essentially auctioned off and, increasingly, this is done so programmatically. Ad inventory across ad networks is bought and sold by computer algorithms based on the price and a variety of attributes associated with the inventory.

Is programmatic buying good or bad for the industry? I am of the belief that market-based systems are generally good for the overall economic health of an industry largely due to the transparency created by it. The prices, amount of inventory and key metrics are all available to the buyers. However, there are a couple of ways in which these systems are imperfect and marketers need to be aware of these limitations. One such imperfection has to do with certain types of marketplace dynamics that arise in an auction based system (which I’ll illuminate with an apple pie example) and another that I’ll explain further has to do with metric choices.

Mmmm, Apple pie!

What do marketplaces, auctions and programmatic buying have to do with apple pies? Suppose for a minute that all apple pies were bought in auctions and suppose too, that you have a pie selling business. Now suppose your business specializes in berry pies but you like to also sell apple pies. You’ve been buying apples at a certain price for some time but now you have to buy them at an auction. You arrive and notice the prices are going much higher than you are used to. What’s going on? What’s going on is that some of the buyers are businesses that specialize in apple products. Those who sell only apple pies, value apples greater than you value apples (since you sell mostly berry pies). The fact that you must now compete with businesses that are very focused on apples can essentially drive you out of the apple pie business. The bottom line is that auction structures favor the seller – the seller gets to sell his/her apples to the person who most wants apples. That being said, if there are plenty of apples, the auction price will go down as the big apple pie buyers accumulate what they need.

Metrics Systems

The second issue has to do with metrics. Philosophically, I like to think about advertising in a holistic way as opposed to placing digital on its own in a silo. Positioning digital as being fundamentally different than other media, I believe, works against the media. When one thinks of digital advertising as being akin to a well-targeted magazine, one tends to create good creative and focus on reach, frequency, branding and other typical marketing metrics. In the early days of digital, the media attracted direct marketers who were more interested in immediate and direct response. This meant they focused on ad clicks and online sales (conversions) as the main metrics. This has not changed and exchanges on these ad marketplaces tend to be made based on historical and predicted clicks and conversions. If you are a brand marketer, who doesn’t sell much product online, these direct response metrics are often not the best way to optimize. So, it’s important to demand and communicate to your programmatic buying vendor the metrics you really care about.

There are many great ways to use programmatic buying and its use is growing each year. I encourage you to find out what you need to know – what it is, how it works, some best practices – because it is going to have an impact on your communications and media strategies. And if you need help in getting better informed, turn to us at Ipsos ASI|digital for thoughts, advice and conversations. We’re happy to point you in the right direction.