• by Tom Triscari , Op-Ed Contributor, March 16, 2015

Assessing programmatic financials has never been more important. Programmatic is quickly pushing marketers into marketing technologists, and permanently turning Mad Men and Women into Math Men and Women. These "marketologists" are rightly asking questions that can only be answered by breaking down programmatic math: Where is my money going? What am I really getting? What am I not getting? So let's shed some light on these questions by asking one big question: How large and sophisticated does my programmatic advertising program have to be to justify bringing it in-house?

The bottom line

If you spend more than $1 million per year programmatically, then you have reached the in-house entry point. If you spend more than $5 million per year, it’s a slam-dunk -- the financial payoff is too irresistible.

Breaking it down

Basically, it boils down to understanding the fixed/variable nature of your managed service provider (MSP) costs, and how much better you think you can manage data activation, impression viewability and fraud.

Let’s say you have $100 to spend on media programmatically. The financial performance of publicly traded MSPs indicates they typically take at least 40%, or $40 in this case. The middleman puts the money to work through his ad stack and provides some useful services like campaign setup, optimization, tagging, data buying and dynamic creative.

Most publicly traded middlemen earn around 10% net profit margins. So, out of $100 in spend with $40 in gross margin and $10 going to profit, that leaves $30 for middleman operating funds.

Of the $30 in operating funds, some go to fixed costs and others to variable costs. Fixed costs are things like account managers, salespeople, optimizers and line managers who oversee trading floor workflow.

Variable costs are more ambiguous, but generally consist of the cost to ingest, store and move the data that fuels trading activity. A good benchmark to use is a $0.10 CPM. The more scale the MSP has with respect to market liquidity, the lower these costs will be. So, if $60 of the $100 budget goes to publishers in the form of gross media spend on viewable/non-fraudulent impressions, and if the MSP pays a $2 CPM, that means the brand gets 30K impressions. Given the $0.10 CPM, transaction costs are $0.10 x 30k, or $3.  The rest -- $27 -- goes to fixed costs.

A simplified income statement would look something like this:

 

Revenue	= $100.00
Gross media spend	= $60.00
Gross profit margin (ex-TAC)	= $40.00
Fixed costs	= $27.00
Variable costs	= $ 3.00
Profits before taxes	= $10.00

Minimal budget to justify in-house

Now that we’ve estimated MSP costs to transact programmatically, we can ask: What’s the minimum set of resources needed to manage an in-house program?

Let’s say you hire someone whose talent justifies $135k/year. Let’s double that to $270k to include benefits burden. Now we gross it up to solve for the minimum size programmatic budget needed to justify an in-house program, which in this case is $900K ($270K fixed costs + $30k transaction costs + $600K media).

Once the brand goes in-house, it needs to assemble (think of data as the glue) a holistic trading desk consisting of a DSP, DMP, and DCO plus a few other ancillary acronyms. Given current ad tech SaaS pricing, in-house programs should not expect to pay more than 20% in terms of media spend.

Our minimum in-house programmatic budget is now just over $1 million ($270k fixed costs + $30k transactions costs + $120k ad stack + $600k media).

Financial leverage of quality inventory

MSPs are not the most incentivized group when it comes to allocating budget toward 100% quality inventory. Given the low viewability bar recently set by the IAB, let's say 70% of MSP spend is good and the other 30% goes to some combination of unviewable and/or fraudulent.

Assume for a moment that unlike your MSP, your in-house buyer refocuses buying rules and strategy to eliminate this $180k/year (30% of the $600k media spend) while holding constant the $2 CPM. That brings the minimum scale necessary to justify in-house investment down to $840k.

A four-person team sounds more reasonable

Employing just one in-house marketer is probably not enough for most brands, so let’s get more conservative and say the minimal team consists of three marketologists plus a manager. Let’s also say the CMO engages with some outside help to accelerate her programmatic resource planning. Add $810k in fixed cost plus $100k in outside help to handle ad stacking and data gluing.

Conclusion

If your programmatic budget runs bigger than $1.75 million/year, you are better off building a 4-person, goal-oriented staff ($840k + $810k + $100k).

But no matter which path the CMO takes, the new norm is about taking more control to reduce the cost and complexity of programmatic activity. Either way, unhealthy fat can be cut out of most programmatic strategies. The most ambitious marketers will capture massive value by running their own trading desk, while other marketers who need to keep managed service as a spending pillar can still achieve many quick-win improvements.

“Yes, there are two paths you can go by, but in the long run, there’s still time to change the road you’re on” -- lyrics by Jimmy  Page and Robert Plant, "Stairway to Heaven"