Understand programmatic advertising, which is one approach to online

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P r o g r a m m a t i c A d v e r t i s i n g :

Real-Time Marketing

The holy grail of advertising and marketing is to deliver the right message to the right person at the right time. If this were possible, no one would receive ads they did not want to see, and then no advertising dollars would be wasted, reducing the costs to end users and increasing the efficiency of each ad dollar. In the physical world, only a very rough approximation of this ideal is possible. Advertisers buy television and radio spots, newspaper ads, and billboards based on broad demographics and interests of likely potential customers. The Internet promised to change this by gathering personal information on consumers and targeting ads to just the desired group of people based on their personal characteristics, interests, and recent clickstream behavior. Consumer personal information was gathered through the use of cookies placed on the user’s browser, which tracked their behavior and purchases online and could be matched with offline information as well. From the beginning, e-commerce was a trade-off between privacy and efficiency: let us know more about you, and we will show you only the advertising and products you are interested in seeing and would be likely to respond to. E-commerce was supposed to end the mass advertising that began in 19th century newspapers, 20th century radio, and exploded with the growth of television. 

But contrary to this rosy scenario, most of the display ads shown to site visitors are irrelevant, sometimes hilariously so, to visitors’ interests. For this reason, the click-through rate for banner advertising is stunningly low, well under 1%, and the price of generic display ads is only $1.26 per thousand because of their low response rate. Check this out: visit Yahoo (the largest display advertiser on earth) on a desktop or laptop computer, look at the prominent ads shown on the right, and ask yourself if you are really interested in the ad content at this moment in time. Chances are slim you are interested at this moment, even if the ad is somewhat appropriate to your demographics. Often, it is an ad for something you have recently searched for on Google, or even already purchased at Amazon. These ads will follow you for days. Researchers have found that only 20% of Internet users find that display ads on websites are relevant to their interests. Programmatic advertising promises to improve the targeting of ads, decreasing costs for advertisers, and making the Web less annoying to consumers by showing them ads that really are of interest to them. 

Digital display advertising has progressed through three eras. In the early 2000s, a firm with a website interested in ad revenue (a “publisher”) would sell space on its site to other firms (advertisers), usually through an ad agency. These were primarily manual transactions. By 2005, ad networks emerged. These networks aggregated thousands of publishers’ supply of ad space into a single network where advertisers could buy ad space on thousands of sites in a single purchase, and publishers could sell to hundreds of advertisers more efficiently. By 2011, even larger ad exchanges emerged, which provided advertisers access to an even larger pool of publisher ad spaces. The result today is an extraordinarily complex ecosystem of players, and sophisticated technologies (called a technology stack). 

With so much supply available, and so many buyers, automated methods were developed to allocate ad space to ad buyers. These methods are collectively called programmatic advertising. Programmatic advertising is an automated method that publishers use to sell their inventory (empty slots on their web pages) to advertisers who want to buy ad space for their customers (brand and product owners looking to market their products and services). There are two kinds of programmatic advertising: auction-based real time bidding (RTB), and programmatic direct, where advertisers deal directly with publishers who have developed their own supply side platforms. 

Programmatic advertising platforms use big data repositories that contain personal information on hundreds of millions of online shoppers and consumers; analytic software to classify and search the database for shoppers with the desired characteristics; and machine learning techniques to test out combinations of consumer characteristics that optimize the chance of a purchase resulting from exposure to an ad. All of this technology is designed to lower the cost, increase the speed, and increase the efficiency of advertising in an environment where there are hundreds of millions of web pages to fill with ads, and millions of online consumers looking to buy at any given moment. Programmatic advertising allows advertisers to potentially show the right ad, at the right time, to just the right person, in a matter of milliseconds. To the extent this is true, display advertising becomes more effective, and perhaps could become as effective as search-based advertising, where it is much more obvious what the searcher is looking for, or interested in, at the moment of search. In 2016, advertisers are expected to spend over $25 billion (almost three-quarters of all total display ad spending, including on banners, videos, and rich media) on programmatic advertising.

This amount is expected to grow to over 80% by 2018. Programmatic advertising is roughly split between RTB and programmatic direct sales. Direct sales offer advertisers more control over ad display, location on the screen, and frequency than RTB. 

Currently, just one-third of online display advertising is still done in a non-automated, traditional environment that involves marketers using e-mail, fax, phone, and text messaging. Traditional methods are often used for high value ads, say, the top screen, expanding ads seen at major newspapers, magazines, and portal sites, and native ads appearing alongside organic content. This is the world of the traditional insertion order: if you want to advertise in a newspaper or magazine, call the ad department and fill out an insertion order. In this environment, firms who want to sell products and services online hire advertising agencies to develop a marketing plan. The ad agencies learn from the firms what kinds of people they would like to contact online. The ad agencies pay data brokers or advertising networks like DoubleClick to help them identify where the online ads should be placed given the nature of the product and the specific characteristics the producer firms are looking for. For instance, let’s say a firm wants to market a new mountain bike to men and women, ages 24–35, who live in zip codes where mountain biking is a popular activity. Ad networks traditionally would direct the agency to direct purchases of ad space from websites that attract the mountain biking audience. 

This traditional environment is expensive, imprecise, and slow, in part because of the number of people involved in the decision about where to place ads. Also, the technology used is slow, and the process of learning which of several ads is optimal could take weeks or months. The ads could be targeted to a more precise group of potential customers. While context advertising on sites dedicated to a niche product is very effective, there are many other websites visited by bikers that might be equally effective, and cost much less. 

The process is very different in a programmatic environment. Ad agencies have access to any of several programmatic ad platforms offered by Google, Yahoo, AOL, Facebook, and many smaller firms. Working with their clients, the ad agency more precisely defines the target audience to include men and women, ages 24–35, who live in zip codes where mountain biking is a popular activity, have mentioned biking topics on social network sites, have e-mail where mountain biking is discussed, make more than $70,000 a year, and currently do not own a mountain bike. The ad agency enters a bid expressed in dollars per thousand impressions for 200,000 impressions to people who meet most of the characteristics being sought. The platform returns a quote for access to this population of 200,000 people who meet the characteristics required. The quote is based on what other advertisers are willing to pay for that demographic and characteristics. The quote is accepted or denied. If accepted, the ads are shown to people as they move about the Web, in real time. As people come on to various websites they visit, the automated program assesses whether they meet the desired characteristics, and displays the mountain bike ad within milliseconds to that person. The programmatic platforms also track the responses to the ads in real time, and can change to different ads and test for effectiveness based on the platform’s experience. Once the system learns from experience, it will focus on showing the most effective ads on the most productive websites. Programmatic direct (or premium) advertising uses the same platform, but publishers sell blocks of inventory to ad agencies rather than single impressions. This stabilizes their income, and puts them in closer contact with advertisers who can also exercise greater oversight over the publishers. The auto industry is a large user of programmatic advertising. Car brands are highly focused on specific demographic groups, income levels, and aspirations. A programmatic campaign begins with the advertiser picking a demographic target, establishing a total budget for the campaign, and then choosing an RTB platform and competing for the delivery of an ad to that audience against other advertisers who may be other auto companies, retailers, or telecommunications providers. The ads are awarded and served automatically in millisecond-quick transactions. Despite its clear advantages, there are also several risks involved for all parties. Programmatic advertisers lose some control over where their ads will appear on the Web. This is a threat to a brand if its products are shown on inappropriate sites. Advertisers lose some accountability for their expenditures because they cannot verify that their ads are actually being shown, and they must take the ad platform’s word that indeed the ads are being shown to real people. This is a transparency issue. Ghost sites and ad fraud complicate the picture as well. There are thousands of ghost sites on the Web that do nothing but attract clicks using various ruses. Ad networks record this traffic and have little capability to determine if it is legitimate, and may show ads on these sites, which will generate fraudulent clicks that are paid for by the ad network and the advertising firm. 

Given the risks, many of the largest advertisers initially did not use programmatic advertising, but that is rapidly changing. It was first used by publishers to sell inventory that was left over after the major ad campaigns had purchased the premium slots on web pages. Programmatic platforms were inexpensive places to sell excess inventory. However, that is beginning to change as advertisers gain confidence and the platforms themselves improve their abilities to avoid inappropriate websites, purge ghost sites, and learn how to detect click fraud. In addition, a number of firms have stepped into the market with tools that address these concerns. 

For instance, in 2014, Procter & Gamble announced that, going forward, it planned to buy 70%–75% of its U.S. digital media using programmatic methods. P&G is the largest advertiser in the country, spending about $4.3 billion on advertising in the United States in 2015. In the past, P&G purchased premium online inventory at the top 100 comScore sites through several different ad agencies and tracked performance using its internal staff. According to P&G’s Chief Marketing Officer Marc Pritchard, programmatic advertising has allowed P&G to more precisely target its advertising at a good price, reportedly producing three to five times greater return on investment than through traditional methods. Other companies are following suit. Cleaning supply company Clorox devoted about 50% of its entire digital budget to programmatic advertising in 2015.

However, some upstart web publishers aimed at the millennial demographic are trying to buck the trend. Vox Media, Refinery29, and Mic have all rejected programmatic advertising and will only sell advertising space directly to advertisers. These publishers object on the ground that programmatic advertising can degrade website functionality by slowing down how fast web pages load in browsers while also cluttering the site with ads that will annoy their visitors. Whether other web publishers will follow this lead remains to be seen.

(Excerpt taken from Laudon, K.C, & Traver, C.G., E-Commerce (2017)


1.  Undertake internet research to determine the current weight of programmatic advertising in online advertising. Remember to cite your sources. 

Using this article, and your own research, identify the pros and cons of Programmatic advertising. You must cite all your sources using Harvard Citation style, including websites.

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