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June 24, 2016, Article

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As ad tech consolidates, business models shift

Ad tech has been historically priced as a percentage of media, or a CPM model. This made sense for brands and agencies because they got used to purchasing ads based on awareness from TV, radio and print. But with ad fraud running wild and bot traffic wasting the industry billions of dollars, ad tech has to move from media-based pricing models to a performance-based or flat-fee model.

“CPM doesn’t capture all the extra goodness that digital is able to produce,” said Adam Cohen-Aslatei, senior director of marketing at marketing consulting firm Jun Group. “Brands increasingly pay for performance like cost per action, as well as include opt-in and non-interruptive units as part of their media mix.”

Going forward, ad tech will need to become more like marketing tech, which has largely adopted a software-as-service model to extract the technology fees and reveal the real media price, according to to Victor Wong, CEO of programmatic creative platform Thunder.

“Media arbitrage cannot be a long-term solution, and it ultimately provides not enough value to people,” he said. “It can only keep happening until the markets recognize the mismatch in pricing and close it. The industry will need to learn to transform inputs to new goods.”

Focus on outcomes
Ad tech is going through consolidation, but it’s only a midlife crisis for companies that rely on soft metrics like impressions and views. Ad tech has to be tied to harder metrics like sales and credit-card sign-ups that demonstrate user engagement and business results, said Erik Mikisch, vp of marketing for ad tech firm Performance Horizon.

A focus on performance has proven effective for fast-growing ad tech companies like Criteo and MediaMath. The former uses a CPC model but optimizes conversions — clients get $14 in sales for every dollar spent, according to the company. While the latter adopts an incremental return on ad spend metric that compares ad spend to actual revenue (or even better, to gross profit).

Return on ad spend “is the purest marketing metric: Most click-focused vendors price on CPC that is not necessarily linked to actual revenue — people click on an ad, but never buy,” said Dan Rosenberg, svp of MediaMath. “Meanwhile, CPC is easy to fake. Bots can simulate clicks, but they can’t simulate actual cash payments.”

Read the rest of the article on Digiday

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