What Is The Market Price For A Guaranteed Ad?

By Amihai Ulman In the few years that I have been swimming in the deep end of the ad-tech pool, I have found the question "What is the market price for an ad?" to be an extremely difficult question to answer. Even highly illiquid and opaque markets like real-estate have had technology, e.g Zillow.com, brought to life for enabling buyers and sellers to gain a basic understanding of what an asset is worth. Well understood standardized markets like debt, equity, and commodities are so easy to price that you can get the price for free from Yahoo's finance page. So let's get back to the question at hand, what is the market price for a guarenteed ad?

While some believe that RTB is an effective mechanism for pricing ads, most economists would argue that unless you can transact in a market that allows spot and forward transactions that can be transacted both long and short, the price of a transaction does not reflect a true market value. In other words, if you can't reliably forecast the price an impression will sell for in the market, you have no idea what the market value is. This lack of a basic understanding of value is bad for both publishers and advertisers.

So, what now? where do we go from here?

Let's break it down. A guaranteed ad has four elements driving price: (i) the target audience, (ii) the attributes of the ad placement, (iii) the premium unique to the publisher, and  (iv) the premium to secure the guarantee. Now that we have the basic components, we have to figure out how to determine the value of each element, their composite, and the distribution of the aggregate across the two parts of the transaction (the MASS Exchange innovation). That said, these  valuation models are guidelines. A true exchange gives buyers and sellers full control over their bids to buy and sell.  Our valuation algorithms are tools to help inform buyers and sellers, not to determine the price of a transaction. The objective is to inform buyers and sellers what are the prices at which they are most likely to get a deal done, based on market conditions.

Further, there is a whole other world of pricing problems when one deals with advertising that does not exist elsewhere, buyer-dependent value. In nearly all other exchange traded products, all buyers will realize the same value from the transaction. Said otherwise, all the buyers of a share of stock in a company like IBM will realize the same performance. This is not true in advertising. Different buyers can realize wildly different results from the same exact ad placement and audience. What is even worse, a buyer can not depend on constant outcomes. If an advertiser has a highly effective creative implementation and uses it for too long or too often it loses it's value and thus the ad placement is deemed to perform poorly.

With all of this uncertainty how can we determine price? A similar uncertainty problem may ring familiar to you if you have studied quantum mechanics. I would argue that we need to think like Werner Heisenberg and come up with the advertising industry's version of the uncertainty principal. An ad placement is many things to many buyers, all at the same time.

Trying to reduce an ad placement opportunity to a single price may be a paradigm that fits neatly into well worn heuristic pathways, but innovation comes by not accepting the present and blazing new paths. There are still lots of very big problems out there to be solved in advertising, you just need to know where to look.