Where's The Risk: Exchange Traded Media Using CPM

The notion of risk is one of the murkiest aspects of the buying and selling of online advertising. Few people in our industry talk about risk because measuring it is so hard. Defining and measuring risk can be difficult, if you start from the wrong premise. In essence, risk is a measurement of the probability that the "deal" does not go as planned. Understanding how market participants each view risk is key to understanding and predicting their behavior. More importantly, enabling the management of that risk is what makes exchanges valuable.

Investopedia defines risk as "The chance that an investment's actual return will be different than expected." Advertising is different. Since the advertiser controls the creative aspect, inventory standardization removes far less risk than it does in the financial realm. To get a better understanding of the risk landscape, we have mapped the risk of key players in the eco-system to understand where their risk lays.

Different modes of pricing such as CPM and CPC can result in drastic differences of where each side of the transaction carries the risk. In other words, who profits or loses. Regardless of  who pays and who gets paid, the risk is the same. This is what we will discuss: how each market participant wins or loses, not how much. In this case, we will discuss risk using the CPM pricing model as our premise for the transaction. To do this, we created a handy-dandy little risk heat map. To the right is the framework.

The key is simple green=good and red=bad

Advertisers - the goals are generally clear. Metrics as simple as sales revenue or as complex as brand awareness drive a desire to change or maintain the current market dynamic. For advertisers, the core risk is represented by advertising that does not achieve it's goal. This risk is manifested in the ratio of price to performance. In other words, how much outcome was expected for the 'spend' vs. how much was actually achieved. Since outcomes are measured in performance per dollar, high price and bad performance define the risk.

Exchanges - As the intermediary bringing buyers and sellers together, exchanges face the largest risk from counterparty default: a buyer fails to pay or the seller's product is not what it was represented as. Since buyers and sellers agree to the price prior to the consummation of the transaction, an exchange's greatest risk is that it is perceived as a place where buyers can't trust sellers or sellers can't trust buyers.

Publishers- For publishers the core risk resides in the ability to monetize content. Getting the highest possible price and delivering the right impression to satisfy the buyer's requirements. Secondarily, accurately predicting how their inventory should perform in market-appropriate monetization. Publishers face the risks of losing out by pricing their goods too cheaply and by presenting inventory that does not perform as promised.

Agencies- For media buyers, the quality of the service they provide is the key business rationale for the fees they garner. A media buyer that is unable to select the right mix of media to achieve the objectives of the advertiser is a critical risk. More recently, buyers have stepped into the transaction flow by leveraging proprietary data to improve performance. Generally, this is achieved by buying from the supply source and reselling to the demand source. These risks manifest in the difficulty of growing their service and proprietary credit risk, as a buyer. Interestingly, the differences between the media buyer risk matrix and the advertiser risk matrix is the raison d'état of trading desks. Media buyers that know that the price of inventory that performs well  is too low, lose a potential revenue opportunity.

In the end, market participants want to measure risk and price it within their transactions. That is why market pricing is important. It's not about some complicated economic theory. Knowing what things are worth when everything is hunky-dory is easy. Knowing what things are worth in the messy real world is hard.