The Economics of Maximizing Publisher Ad Revenue — Part 1
A few months ago I presented the economics of maximizing revenue at the 2011 Adobe Omniture Summit. My presentation was directed at Publishers to illustrate business optimization strategies that yield greater display advertising revenue. The principles conveyed in that presentation are a foundational model for advertisers and publishers alike as they build their respective ad strategies; they also serve as a framework for navigating a changing display advertising landscape. I’ll be sharing those principles and their implications through this article and ensuing posts tailored to online advertisers and digital publishers.
Maximizing display advertising revenue is a publisher’s goal, but this objective is largely symbiotic with advertisers’ need to achieve better business results through advertising. I’ll begin with a recap of economic principles illustrating how publishers can meet their goals while increasing advertiser results in turn.
Businesses assess revenue opportunity using a demand curve. The demand curve below represents a typical distribution of consumer demand, from those willing to pay the most for a product to those willing to pay the least. The area beneath the curve represents a seller’s total revenue opportunity.
The graph above illustrates the amount of revenue a seller captures by offering a single undifferentiated product. One price point yields a corresponding quantity of buyers and revenue equal to Price * Quantity. You can see in the graph that a single undifferentiated product leaves considerable money on the table in the form of unfulfilled buyer demand. Savvy retailers, however, have demonstrated numerous ways to increase revenue by differentiating products at multiple points across the curve.
Revenue maximizing tactics:
- Product differentiation: Automobile and Electronics manufacturers create product lines that offer multiple versions of the same product with different feature sets. Most people can relate to the experience of comparing feature/cost benefits that define their position on the demand curve.
- Brand differentiation: Some manufacturers introduce similar products under different brand names or SKUs. These products may vary in quality or may even be the same product sold under different labels. Many of the products sold through discounters like Costco, Sam’s Club, or Overstock.com are made by brand name manufacturers addressing consumers on the cost conscious end of the demand curve.
- Price differentiation: Coupons, sales, and clearance racks are all examples of retailers selling the exact same products at different price points. Each one requires a small inconvenience (clipping a coupon, waiting for a sale, or accepting limited selection) in exchange for lower prices on those products. These techniques are an integral part of many retailers’ merchandising strategy.
- Auction-based and supply & demand pricing: Airlines are a good example of sellers offering similar or identical products at price points across the entire demand curve. Airline ticket prices vary depending on supply and demand for a flight, advanced booking dates, and fare restrictions. Hotels and car rental companies maximize revenues using similar techniques.
What it means
Economics reveals two fundamental ways for sellers to increase revenue: 1) improve the efficiency by which they address the current demand curve (efficiency measured as a % of total demand beneath the curve), and 2) raise the demand curve itself. These two objectives apply to virtually all revenue generating businesses including digital publishers who monetize their business through ad sales.
Key takeaways for Digital Publishers
Publishers seeking to maximize ad revenues need to evaluate how well they package their ad inventory to maximize revenue across the entire demand curve, from the highest revenue generating premium impressions down to the last remnant impression. Breaking down these two objectives presents the following strategies:
Improve efficiency beneath the demand curve
- Segment display ad inventory to monetize all points along the curve, not just discrete premium and remnant price points
- Maximize the value of each segment by packaging site context and audience characteristics that advertisers can optimize against
- Match differentiated segments to advertisers who benefit the most and will pay the most to acquire
Raise the demand curve
- Build a strong media brand to enhance the value of your entire inventory; ads associated with a quality brand deliver greater results to advertisers
- Generate high quality content to produce greater visitor engagement and interactivity with your site
- Improve site usability and ad placement to deliver optimal branding and direct response experiences to advertisers