Can You Find Happiness With a Third-Party Channel?

Last week we talked about the first harsh reality of ad-funded online business models without critical mass, you don’t have much of a play. We walked through the math of pageviews and the cost of an ad sales rep and concluded that without substantial ad inventory (in the multimillion-pageviews-per-month range), most sites would have trouble breaking even on a solely ad-funded strategy. And, we ended with the plaintive cry of wannabe ad sites everywhere: “But if hiring my own ad sales rep is so expensive, can’t I just use a rep firm?”

In past columns, we’ve talked about the types of third-party channels available for selling online inventory. Rather than repeat the main points of those columns, we’d like to take this discussion from another angle: What are the channels themselves looking for when they sign up a new site?

The ideal situation for third-party channels is to represent a site with plentiful, targeted, brand-name inventory that advertisers are begging to buy. They would love exclusive representation of this site with a long-term contract. And, they would like to get top dollar in terms of their sales commission.

This would be a sweet deal, indeed. The ability to move a lot of inventory at top dollar in an exclusive long-term relationship would be hard to beat. Unfortunately for third-party channels, most sites with the characteristics described above have already figured out that an internal sales force will deliver superior results at a lower cost and will have moved in that direction.

So, let’s assume that your site (like most) doesn’t meet all these ideal characteristics, and let’s look at what this implies for your channel options. If your site doesn’t have sufficient inventory, it’s unlikely that a major third-party channel will agree to provide true individual representation of your site that is, to actively market your site by name and specific description to advertisers and media buyers.

Why? Because there is no upside for them in doing so. Why should they spend all the time and energy necessary to learn your pitch and call on clients on your behalf if you have only 1,000,000 impressions per month to sell? Remember, third-party channels are mostly about selling volume, and if you can’t provide volume, that makes you less attractive to them.

Now let’s assume you have volume but you know very little about your audience or you have an undifferentiated audience that looks very much like the average web user. Again, this diminishes your attractiveness to the channel. Instead of being able to easily command top dollar for your inventory, it has to settle for run-of-the-mill, low CPMs. It’s hard for the channel to justify putting a lot of energy into aggressively representing your site.

OK. You have a lot of targeted inventory, but you want to leave yourself the option to hire an internal sales force when you get to the next round; therefore, you don’t want to sign an exclusive agreement or a long-term contract.

Once again, you need to look at this from the perspective of the third-party channel. Why should it invest a lot of time in putting your name in front of key media buyers and advertisers and building your brand only to have you pull the deal out from under it when things take off? If you’re not interested in signing a long-term exclusive relationship with it, it may not be highly interested in providing you with the best it has to offer either.

If any of the above describes your situation, where does all of this leave you? You do have third-party options, but they may be less extensive than you thought. Most likely, you’ll end up in an ad network of some sort. That usually means your inventory will be lumped in with the inventory of other sites with similar audiences, and your site will probably not be individually represented.

Instead, your inventory will be sold as part of a larger bulk buy of the desired demographic or category. This has significant implications for CPM. Ad network CPMs for run-of-site inventory often fall in the $1.75 to $6.00 range, most of it at the low end of that range and don’t forget that you will pay out half of that to your sales channel.

If you do a great job of building your story and advertisers are asking for your site’s inventory by name, your CPM could be much higher, but if you were going to invest that much energy, you probably would have hired your own sales rep anyway.

Are we suggesting that third-party channels don’t do a good job? Not at all. In fact, many of them are great at what they do, and you just have to look at their financials to know that for sure.

Third-party channels have their business realities and objectives just as you have yours. And there can be a good fit where those objectives align. But a site publisher cannot assume business-objective alignment without really understanding how the reps and networks make their money. In our opinion, assuming that a rep firm will solve all your problems is erroneous for most sites that have not invested in the fundamentals of a strong ad-funded business.

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