Commentary

Is Cost-of-Sale Too Costly For Ad Tech?

With the new year come the rounds of industry predictions, many with an unfavorable outlook for ad technology. It’s understandable, considering the headlines we’ve seen about layoffs, M&A, and market retraction.

Simulmedia CEO Dave Morgan argues that disruption is coming from marketing tech swallowing ad tech because, as he puts it, the “media and marketing world is shifting from serving intermediaries to serving principals, from delivering media outputs for agencies to guaranteeing business outcomes for marketers … unfortunately, most ad tech today is anchored on the wrong side of those shifts.”

Or perhaps the market is simply suffering from the lack of differentiation. Hundreds of companies function as ad networks, exchanges, DSPs, DMPs, SSPs, etc. Some of them specialize by channel, with specific flavors for mobile, video, native, and more. To the ad buyer, we all look the same.

But there is another, inexorable force transforming ad tech: cost-of-sales.

To paraphrase RBC Markets analyst Rohit Kulkarni  (quoted in this post), it may be easy for ad tech companies to gain a perch, but it’s harder to scale. So how is cost-of-sales affecting companies’ ability to grow? Here are observations that triggered my thinking:

--       A sales exec peer shared that his company reorg included cuts to the sales team. Sales is usually the last to be touched in a “right-sizing,” so I was intrigued. Those affected? Reps calling directly on media planners and buyers. Instead, the company would focus on trading desks. This move discounts the influence of upstream sellers (who drive demand from planning teams, with trading desks executing the buy). Lean companies are retreating from this type of sale because it’s a costly endeavor.

--        The typical SaaS model is focused on new logo acquisition. The sales rep signs a new customer, hands it off to a customer success team, then moves on to the next deal -- and commission. In ad tech, campaigns are the currency (not pure software licenses), which means sales doesn’t get to walk away. Recency (having your people be top of mind for a client) is a major factor in getting on media plans; it requires continued meetings and interactions with the same people/agency/client. This coverage model gets expensive. I don’t mean steak dinners and custom sneakers, but the cost of continually adding more sales reps to prospect new customers.

--        Recently, I attended an industry presentation where Patrick Harris, Facebook’s lead for developing agency relationships, indicated that the company has 300 people dedicated to calling on agencies. That’s a sizable team for a player almost everyone considers a must-buy in any campaign. Despite its compelling nature, the Facebook ad solution (one of the best in the market) doesn’t sell itself.

--         A quick glance at earnings from top ad tech players (FUEL, RUBI, TUBE) show how big an impact sales and marketing have in this business. As a comparison, sales and marketing is a larger line item than tech development or R&D for many companies in our industry. Ad tech does not sell itself.

There’s a plethora of companies in our industry that received massive injections of capital to scale, but how many have the reserves to sustain growth at such a high cost-of-sale? How many companies are living on borrowed time and borrowed dimes? The cost of capital is climbing, as Wall Street and investors display more caution about our space. Funding is not as readily accessible as it was even a year ago, and the public markets appear closed -- for now. Survival means healthy cash reserves and/or a clear pathway to profitability.

Consolidation is coming to ad tech. Those who have proven to be "capital-efficient" at achieving growth and scale will have the best opportunity to survive -- and possibly thrive.

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