• by John Billett , Op-Ed Contributor, March 25, 2014

For those of us fortunate to have operated extensively in advertising media price monitoring across many countries, and witnessed a range of trading inputs and outcomes, the U.S. market retains a fascination and an element of unexplained surprise. 

The sophistication of the U.S. advertising economy coupled with the presence of advanced intelligence trading systems operated by very talented executives with ample sensitivity and understanding of business needs, ought to produce logical and empirical evidence to support media trading decisions.

It’s entirely feasible, for example, that the spread for the same ad spot in the same show, attracting the same audience could be as much as plus or minus 30 percentage points, so that for a spot costing an average of $100, for example, the smartest advertiser would be paying $70 but somewhere in the US, someone else would be paying $130. 

This potential $60 spread has, of course, not gone unnoticed and advertisers are, in larger numbers than ever, enquiring why this is the case. Increasing interest in establishing reasons and getting improvements are rising up the procurement agenda. 

There are several mitigating factors: 

• There are both national and local markets in the U.S. Different levels of demand apply.
• There are more national media networks than in other countries. So market operators have more choice. It's "easier" to get it both right and wrong.
• The Up Front and Scatter markets operate independently and the price coefficients exhibit wide differences.
• Some advertisers take seriously the editorial environment of their purchases, while others just want cheap ratings.
• Until recently audience measures were of sets rather than individual viewing, distorting the actual viewing figures and causing people to pay similar prices for very different audiences. 

But these understandable and well-established trading circumstances cannot alone explain the wider than logical spread of prices.

The reason is that two additional elements dominate the U.S. trading market - a focus on both the average and relative prices as value measures – factors that do not occur elsewhere in the world.

First, the average: It's a simple mathematical process that produces seemingly irresistible results. Take the sum of all observations. Divide the total by the number of observations. The resulting single number is the average. 

The average becomes the benchmark. It is considered as the norm. Take this year’s average and compare with last year’s average and see if you have improved year over year and so on. If you are better than the average, that's good and vice versa. 

Sorry to be the bearer of bad news. It's just not the case. Beware the tale of the statistician who drowned in a pond just three inches deep--on average. 

When it comes to media matters, what matters is the spread or range around the average rather than the average itself. 

There is a massive difference from a price average of 50 if the spread is 49-51 than if the spread is 25-75. The first average is meaningful; the second is meaningless. 

Second, relative value: Almost all trading negotiations center around comparing the percent change in advertiser pricing year over year versus the market average. "Our prices are up 2% versus the market increase of 3%" is considered "good buying." 

But this is mathematical delusion. It assumes the market price estimate is accurate, which in my experience owes more to informal chatter than empirical evidence in the U.S. 

Furthermore this pseudo metric takes no account of the actual as opposed to relative prices paid. If your prices were 25% cheaper than the competition last year then a larger increase than the competition means you are still paying far less than them. And if you were paying a 10% premium, a smaller increase means you are still paying a lot more. 

The straightforward conclusion is that with no more than 35% of U.S. advertisers employing independent third-party validation and oversight of their media pricing and value, the spread of pricing for identical inventory will continue to be unacceptably large to the benefit of poor value delivering media owners and to the enormous advantage of the truly vigilant advertisers. 

All advertisers, not just the 65% using inappropriate pricing averages and misleading relative rather than absolute price changes, need to take further steps. 

Of course the 65% should start auditing but 100% of U.S. advertisers need to abandon these inaccurate year over year comparisons, abandon relative measures of trading performance and abandon the meaningless average. 

It’s time to get tough on absolute value and returns.