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 Revenue

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.

Eco­nom­ics 101

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.

A sin­gle undif­fer­en­ti­ated prod­uct fails to max­i­mize buyer demand

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.

Mul­ti­ple dif­fer­en­ti­ated prod­ucts cap­ture addi­tional revenue

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 Over​stock​.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

1. Seg­ment dis­play ad inven­tory to mon­e­tize all points along the curve, not just dis­crete pre­mium and rem­nant price points
2. Max­i­mize the value of each seg­ment by pack­ag­ing site con­text and audi­ence char­ac­ter­is­tics that adver­tis­ers can opti­mize against
3. Match dif­fer­en­ti­ated seg­ments to adver­tis­ers who ben­e­fit the most and will pay the most to acquire

Raise the demand curve

1. Build a strong media brand to enhance the value of your entire inven­tory; ads asso­ci­ated with a qual­ity brand deliver greater results to advertisers
2. Gen­er­ate high qual­ity con­tent to pro­duce greater vis­i­tor engage­ment and inter­ac­tiv­ity with your site
3. Improve site usabil­ity and ad place­ment to deliver opti­mal brand­ing and direct response expe­ri­ences to advertisers