One primary benefit of supply path optimization (SPO) is a reduction in the ad tech tax. But the way reduced fees are applied can have a drastically different impact on the marketer. Fee reduction can result in reduced CPMs, improved inventory access, or some combination of both. It’s up to the marketer to understand and actively manage the way preferred exchange partnerships impact campaign economics.
Standard Exchange Fees
In a typical first price auction, the bid price submitted by the DSP is discounted by the exchange based on the exchange’s publisher-negotiated take rate. The net bid is submitted into the publisher’s ad server where it competes with other potential sources of demand. If this net bid is awarded the impression, the publisher then sends a win notification to the ad exchange. The exchange in turn notifies the winning DSP. In the example below, the exchange’s take rate is represented as 20%. A $10 gross bid is dropped down to $8 when submitted into the publisher ad server:
Cost Savings Discounts
When a marketer and exchange establish a strategic alliance as part of an SPO process, the bidding math changes. Let’s say an exchange agrees to reduce its take rate from 20% to 10% for its preferred marketing partner. The new bidding math might look like this:
Just like the previous diagram, the marketer’s bid is reduced by 20% and then submitted to the publisher’s ad server. If the publisher awards the impression to this marketer, then a discount is applied to the CPM the marketer must pay. The marketer’s preferred take rate is applied in step 5, when the win notification is sent from the exchange to the DSP. By applying the reduced exchange take rate after the ad serving decision, the marketer’s competitiveness in the final publisher auction is the same as its pre-SPO setup, but it can now buy these impressions at a lower price. We call this flavor of fee reduction a “cost-savings discount” because the discount results in measurable cost savings for the marketer. A cost-savings discount is ideal for marketers aiming to maintain inventory access while reducing CPM rates.
Win Rate Boost
Not all marketers strive for low CPMs. Some have very real supply constraints for campaigns aimed at reaching small or niche audiences. For these marketers, the SPO objective is to increase their odds of winning highly desirable impressions. Let’s say again that a preferred exchange partner agrees to reduce its take rate from 20% to 10% but now with the goal of improving the marketer’s win rate. The new bidding math looks like this:
In this new approach, the fee reduction is applied BEFORE the final publisher ad serving decision. The result is that a $10 CPM gross bid from an SPO-enabled marketer beats an $11 CPM gross bid from a standard marketer -- after exchange fees, the lower gross bid is worth more to the publisher. We call this approach a “win rate boost” because the outcome of the exchange’s reduced fees is a higher marketer win rate.
Compared to the cost-savings discount, this model may seem to benefit the publisher more than the marketer. The marketer pays the same $10 CPM, but the publisher receives a higher net bid ($9). The result, which may be less obvious, is that the marketer’s bids are now more competitive.
A Blended Approach
Marketers entertaining the idea of initiating SPO strategies must decide what’s more important to their campaigns: paying less or winning more. In today’s economic climate, cost savings is likely the priority for most marketers. But even with a cost savings goal, some campaigns might benefit from a win rate boost. Some advanced exchanges are beginning to allow marketers to modify their discount application based on campaign goals. For a prospecting video campaign, a marketer may prefer a cost-savings discount to reduce CPMs. For a retargeting campaign, a marketer may prefer a win-rate boost to increase their ability to reach a highly valuable audience. The savviest marketers are collaborating with the most sophisticated exchanges to implement these blended strategies across different campaigns.
Whether the goal is to minimize CPMs or maximize inventory access, marketers will set themselves up for greater success if they enter SPO partnership discussions with a clear set of priorities, a detailed understanding of auction economics, and a well defined measure of success.