For Programmatic To Grow, Commercial Terms Must Change

Advertisers have historically paid for their DSP/programmatic execution as a percentage of their media spend. This pay-as-you-go model worked for several reasons: First, advertisers needed to fluidly move their budgets between multiple niche DSPs that specialized in a specific channel, such as mobile or video.

Second, advertisers were still testing programmatic and unsure how or if their programmatic spending would scale.

But programmatic is now a mature industry, evidenced by the $31 billion in advertising spend transacted programmatically in 2018, per eMarketer, and the continued consolidation of technology vendors.

Advertisers no longer need to spread their budgets among 10 to 15 niche DSPs as six or seven enterprise-grade partners have emerged. They can meet all of their needs and allow them to consolidate spend.

Advertisers have also accepted programmatic as an essential part of their media plan with a firm understanding of how much spending they will run programmatically.



Thus, the need for a pay-as-you go pricing model is outdated. Advertisers should treat programmatic advertising as a long-term investment and seek significant cost efficiencies for consolidating their media spend.

The other challenge with the percentage-of-spend tech tax is that the more an advertiser spends in media, the more they pay technology vendors. This is the inverse of how media has historically been bought and sold.

Outside of programmatic, publishers lower their overall pricing when an advertiser spends more.

This is a competitive advantage for large advertisers, as they can secure more media inventory at lower CPM’s. Contrast that with programmatic’s percentage-of-spend model, where the largest programmatic spenders pay the most in technology costs.

Another interesting outcome of the maturation of the programmatic landscape is that more direct-sold publisher deals are being transacted via programmatic. By 2020, eMarketer projects more than four out of every five dollars U.S. advertisers invest in programmatic advertising will go to either programmatic-direct deals or private marketplaces (PMPs).

Today, an advertiser will secure pricing and inventory from a publisher and then run that via their preferred DSP. But why would an advertiser pay their DSP 10% to 15% fee on top of their negotiated rates simply to serve the advertising?

By way of example, if an advertiser secures premium video inventory from a publisher at a $20 CPM, they will ultimately pay an additional $2 to $3.50 CPM to their DSP just to serve the inventory.

Would an advertiser pay a $3.50 CPM to an ad server? With direct-publisher deals representing an increasing amount of advertisers’ programmatic spend, the percentages don’t work.

Finally, we have all been hearing about how media will be transacted programmatically, with TV receiving the most attention. While I agree with this concept, the current programmatic fee structure will hold back most advertisers from moving their TV budget into programmatic.

If tech costs for delivering a linear TV impression were roughly 1% to 2% of media costs, why would a company move its TV budgets to programmatic and spend 10% to 15%?

As programmatic matures, the business model must change to keep up with the times. Advertisers will migrate from the pay-as-you-go percentage-of-spend tech tax to new models, such as long-term subscriptions. We’ve seen this with everything from marketing technology to media services.

Advertising must keep pace with the rest of the ecosystem.


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