"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Jeff Hirsch, president at CPXi.
The last decade has brought about significant change in the media landscape. As the market continues to steadily fragment, companies in the media transaction space are clamoring for larger slices of the revenue share.
Many of those that have successfully gone public seem to be accomplishing that goal; I recently took a look at the published gross profit margins for a few public media transaction companies in our space.
I found margin numbers ranging from a low of 49% up to an astonishing 81%, which is impressive. Maybe too impressive.
Gross profit margin is defined as the proportion of money left over from sales after accounting for the cost of goods sold, divided by revenue. In a simplistic sense, what value are these firms adding to media and what are they earning for that value?
Looking at these numbers tells an interesting story about how our industry measures and assigns dollar figures to the value we add to media. With the continuing advancement of technology and tools to allow marketers to manage their own media, profit margins likes these simply cannot be sustainable.
One salient point is that, after more than two decades in the space, I can confidently say that the highest performing campaigns are almost always those powered by a marketer’s first-party data. I have yet to see a company that cannot make a campaign work with first-party data, no matter their tech resources. These media transaction companies also use that first-party data to power their platforms, however. So, in other words, an advertiser’s own asset – their own data – is being used to leverage these excessive margins for companies that buy and sell media. How exactly is the media transaction company bringing value to the table?
The arguments used to justify these numbers are many: the ecosystem is too complex; it doesn't matter what the margin is as long as the campaign works; it just costs that much to buy and sell media. But these arguments are becoming less valid as tools become better and marketers grow smarter.
There are multiple platforms in the space that offer transparency – giving advertisers data management tools to leverage their own data for campaigns, automated delivery and optimization, measurement and reporting, and other features necessary to reap positive results from their marketing strategies – and all at pre-arranged margins.
I do not mean to assert that media transaction firms are not valuable to marketers at all or that they should be cut out of the deal altogether. These companies supplement first-party data with third-party data that can be very important to gathering accurate and timely consumer insight.
I do, however, contend that advertisers are being gouged coming and going by some companies, especially considering that it is their own data powering these campaigns. Further, I assert that this issue harms the overall ecosystem by fostering an unrealistic notion of what buyers and sellers should be paying these companies, one which does not necessarily match their value add. Not to mention it simply undermines advertiser confidence in the entire space. We’ve reached critical mass: It’s time for the industry to issue a call for transparency.
So, consider this that call. The entire industry needs to make it a priority to frame the discussion around margins in a way that respects the true value a media transaction company can add to an advertiser’s marketing strategy. We need to implement standards and best practices that emphasize transparency, so advertisers can know exactly what they’re paying for and why, and feel confident that they’re getting the value they paid for.
This is an industry driven by data and intelligence; technology will continue to improve, marketers will continue to get smarter and margins will continue to reflect this intelligence. Excessive margins are simply unsustainable and, I’d argue, detrimental to the health of the industry. Companies that are extracting too much will suffer if they do not start adjusting to the future of marketing, but we can’t allow our industry to suffer along with them.