When brands spend programmatically, they often do so based around performance metrics, like cost per click. But because they aren’t the ones buying directly from the ad exchange, they don’t know the real cost of media, and Simkins has noticed agencies and/or tech platforms “take advantage of the model through inventory arbitrage and margin.”
And that arbitrage can be hidden in tech fees. “We know 40% to 60% of working media dollars are being absorbed in inventory margin,” Simkins said. “The onus is on the advertisers to change the agency models and the way they buy programmatic.”
One can argue that’s what Turn’s SaaS revenue model was going for: Extract the tech fee, reveal the price of media.
But as Simkins noted, advertisers must change. But the question is: Do they want to?
“Many of them don’t, to be honest,” Simkins said. “Many of the high-level people don’t understand the way the industry works today.”
And because current DSP buying models are based on what marketers want – that is, paying for IOs or a percent of media – change is difficult.
“The revenue model is at the will of the market,” said Ed Montes, chief revenue officer at DataXu, which fields both a buying and data management platform (DMP). “From my perspective, you want to give your buyers choice. If they want media price transparency, you should give them that. If you want the ease of billing – one simple price – you should provide that as well.”
And that one simple price – though it can hide arbitrage – is more palatable for marketers than a whole bunch of different fees.
“It’s rare for an enterprise client to buy [on a subscription basis],” said Adam Heimlich, SVP of programmatic at Horizon Media. “They look at a skill that’s highly specialized, complicated and opaque and feel they need to outsource it to someone they trust.”
It’s not that marketers are happy bundling tech fees into the IO, said Jon Suarez-Davis, chief marketing and strategy officer for the DMP Krux. “Marketers want absolute transparency across the value chain,” he said. He was speaking from his experience managing digital media for the Kellogg Company from 2009 to mid-2015.
Suarez-Davis added, “They would like to have the technology and other non-working costs (that aren’t related to impression delivery) separated. The tension is that marketers are not built to do that. They’re built to invest money on a campaign-by-campaign basis. That’s what is at odds with the SaaS model.”
His perspective is in line with numerous other industry sources. After all, tech subscription fees are usually IT department expenses.
“You’re running up against entrenched ways of media buying,” noted one industry insider who asked not to be named. “Media has been bought and has been priced a certain way for quite a while. Trying to change the way people behave when they have existing business systems in place is challenging.”
That’s not to say marketers won’t ever pay a monthly fee. They willingly subscribe to data providers or to Nielsen for ratings. Additionally, email marketing providers offered subscription-based pricing. It’s notable, for instance, that while Turn is moving away from subscription-based tech fees for its buying platform, CEO Falck said the company would still support that model for its data management platform.
“[Marketers will] get locked in on analytics services, ratings data, things like that,” said Dan Salmon, managing director of BMO Capital Markets. “But you need that stuff every day. When it comes to optimizing the campaign and buying the space where you put your marketing message in front of the consumers, they need a great deal of flexibility.”
And that need for flexibility means marketers generally don’t want to commit to a monthly fee for a buying platform, transparency benefits notwithstanding. After all, DSP use varies heavily for buyers.
“This is their main objection: They have a lot of seasonality,” said a buying platform source, who has brand clients running on a subscription basis.
If an advertiser has numerous brand managers, what’s the best way to divide the tech fees among them on a month-to-month basis, especially as their use of the buying platform changes? “How do they know if they should charge Brand A?” the source said. “What do they do if they have a dark month?”
“You introduce a SaaS fee, they’re like, ‘Oh man, what do I do with it? Split it evenly between the four brands? But what if one brand spends 3X compared to another?’” Suarez-Davis added. “Do you weight it? Do you spread it across the quarter? The year?”
Say a brand gets $10 for its online ad buying. There are processes and protocols for the way that’s spent. But if $8.50 goes to media, plus $1.50 goes to a tech fee, that adds confusion and complexity that brand managers simply aren’t trained to think about.
Now consider that advertisers might work with two or three buying platforms. Because of the walled garden effect, there really isn’t one platform to manage everything. So now advertisers with multiple brands must figure out how much they’re willing to pay on a subscription basis for different platforms that have different strengths and weaknesses, each reaching different audiences.
And here’s another reason marketers might not want to spend dollars up front: It’s not always clear what value DSP technology offers. While these platforms have R&D costs sunk into them, for many clients it’s only an access point into the world of media buying. Why pay a subscription for that?
Gartner analyst Martin Kihn points out that DSPs try to differentiate with better bidding algorithms or better targeting. “But if you have experience in media, you could come up with a great bidding algorithm or do audience targeting yourself,” he argued. “So what’s indispensable about the product other than having a seat on the exchanges?”
Another issue is immaturity, both around the technology and the companies that develop it. The technology itself is just on the cusp of maturity.
“Given how new the tech is, it hasn’t stabilized yet,” said Rich Sobel, SVP of AOD solutions at Publicis Groupe’s VivaKi. “There are a lot of players who are close or are there already, but they’re just there now. They haven’t been doing it for four or five years in a very stable way.”
And brands certainly don’t want to commit to a buying platform that suddenly finds itself unable to meet client demands. As Horizon’s Heimlich pointed out, “Some platforms were totally unprepared for how important viewability or brand safety has become.”
Moreover, the buying platform’s placement in the marketing tech stack is uncertain. Email marketing services might have been priced on a subscription basis, but now many have been absorbed into marketing clouds, where they’re bolt-on features – and supported by established enterprise software companies.
Which brings up another reason why marketers might not subscribe to a DSP.
“It’s no secret many platforms appear as entrepreneurial enrichment schemes, and many are looking for an exit,” Kihn said. “Many are managing toward that exit, not for the market.”
Fair or not, that perception brands all ad tech companies – even those that are well-managed. And that’s going to impact a marketer’s willingness to upend her pricing model and commit recurring revenue to a buying platform.
For all those hurdles, there are benefits to subscription-based pricing.
“I would like to see [the model] happen more,” said Sobel. “Companies that [drive] toward SaaS have a longer life as a software business, which is attractive to us as a partner.”
Sobel declined to say whether VivaKi supported this business model with any of its tech partners. However, he described what VivaKi would look for if it were to agree to a hard monthly commitment: “We’d be more inclined to do it with platforms with a certain amount of stability, a certain rigor, a certain level of service and support.”
Sobel means the platform achieves goal on a regular basis and, from a technological standpoint, it doesn’t go down and the user interface is consistently effective. Moreover, the platform must show “consistent and persistent results, so there are no major surprises in terms of what you’re doing from a campaign management perspective.”
Finally, he expects consistency in the services the vendor provides around the platform. (Bear in mind that Sobel previously noted the technology mostly hasn’t stabilized – and the platforms that he considers stable haven’t been so for long.)
Because of all these considerations, it’s usually larger brands – those that have committed a lot on programmatic and that have more internal resources – that are willing to engage in a subscription model for their buying platforms.
“In the last five years, you have seen General Mills, Kellogg’s, Unilever, P&G, Kimberly-Clark and many others have stood up that concept,” Suarez-Davis said.
Kellogg’s, where Suarez-Davis worked, set up a hub called a Center of Excellence (COE) that centralized the company’s media buying power, so brand managers didn’t have to dicker with managing subscription fees amid seasonal changes.
“[The COEs] steward the dollar with the agency on behalf of all the brands,” Suarez-Davis said. “That facilitates the use of things like SaaS models. You handle it there and allocate costs out accordingly. If you don’t have that, it’s difficult to have a SaaS model.”
He’s aware, of course, that not every marketer has the resources to centralize that media buying capability. And doing so is not the only way for marketers to achieve media transparency.
“There’s not a right way to do it,” he said. “[Each company] is going to determine if a SaaS platform is the most effective and efficient way."
Horizon’s Heimlich agreed that SaaS isn't the only option to gain media transparency.
“[Enterprises] can go to a transparent agency solution,” he said. Additionally, there are independent trading desks, consultants or auditing services that can sanity check an agency’s services. Companies can also itemize fees or build transparency into the contracts of their agencies or tech providers.
“[Clients] need a lot of help just knowing what to do,” Heimlich said. It’s another reason why SaaS shouldn’t be considered the definitive model for media transparency. “They need a lot of help just getting to what technology they need to license, and what their long-term strategy should be around technology.”