“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 Alan Pearlstein, president and CEO of Cross Pixel Inc.
The current pricing models for purchasing third-party data are far from optimal, and are actually holding back usage by advertisers.
Most data sellers and buyers use a cost-per-impression (CPM) pricing. My company, for example, is paid a CPM rate for every ad impression delivered to the audience we provide. While this model offers pricing certainty, it is highly problematic because it places a fixed value on an audience, regardless of the context and value of the media placement. The model assumes that all audiences are equal regardless of where the ad appears.
The reality is that reaching an audience with a display ad on Facebook (FBX) is not equal to reaching the same audience on NYTimes.com, and the price of the media reflects this. How many ads are on each page? How long is the user on the page? Where is the ad placed? Is it below the fold? What is the content being engaged? All of these variables matter and are directly related to the value of the audience as well as the impression.
The CPM model is also holding back the growth of third-party data usage by the industry. The biggest new supply of inventory in RTB is from FBX. CPMs on FBX average $0.45. Once you add in the approximate cost for your typical “in-market” audience data, which is about a $1 CPM, the price tag of the FBX media more than doubles. In order for the data to justify that extra cost on FBX, it would need to outperform advertising using no data by more than 200%.
I think we all know that this degree of lift is unlikely, and use of third-party data on FBX and other low-priced CPM media, such as Yahoo Mail, is very limited or nonexistent. The industry needs a new model so that valuable data can be utilized in all campaigns.
A New Model
A few DSPs and data sellers have started to address this issue by offering a new model that should be the industry standard: percentage-of-media pricing. Data is priced as a percentage of the CPM of the media. This model aligns data costs with media value and identifies the right value of the audience.
Display media, particularly in the RTB environment, is purchased via auctions, and has found its true value. With percentage-of-media pricing, data is priced accurately. More importantly, usage of data on low cost CPMs like FBX is now possible. When data is priced at 20% of the value of the media, third-party data works very well.
The broader adoption of percentage of media pricing for third-party data should lead to a significant increase in usage by advertisers, improved targeting and, most important, superior campaign performance. Every DSP and DMP needs to have the capability to manage percentage of media pricing for third-party data to work at scale.