The Economics of Third Party Sales Partnerships

You’ve read our recommendations on the choices and trade-offs you can make when selecting an independent sales organization to handle your ad revenue generation. Today we give you the financial implications of these choices.

There is a natural tension in any market between margin and market share. In the Internet ad space, this shows itself in the conflict between sell-through rates (the percent of your ad inventory that is sold in a given month) and the sanctity of the rate card (or yields, in common parlance). Your sales operation can focus on getting the highest rate for every order closed, or they can focus on selling as much inventory as possible. No one (including a crack internal sales team) will do an equally good job on both.

Some ad networks, like 24/7, will promise to sell 100 percent of your inventory. Others, such as DoubleClick, will focus on getting the highest value for the inventory and leave significant numbers of impressions unsold. AdSmart covers the market by offering sales options in both camps: Its Marquee and Pinnacle divisions focus on single site branded sales, while the Channels group has a greater focus on sell-through. Both models have merit; both represent sound business reasoning. You have to decide where your business goals and values lie to make the best partnership.

Another extremely important economic issue centers around the question of exclusivity of representation. In this type of business relationship, you commit to making the sales agent your sole selling engine, and all ad sales on your site move through that partnership. Many (but not all) Internet ad sales businesses request this kind of exclusivity, meaning that it makes a commission on every dollar sold, whether it sells the space or you do.

In many situations, this is not unjustified as the Internet ad sales firm is investing in your site with custom marketing programs, missionary sales effort, relationship building with advertisers and agencies, and the like. The business model won’t work if they do all that work, and then you choose to end-run them on the most profitable accounts. At the same time, you’ll be double paying if you should decide to experiment with alternative sales channels while under contract, so don’t take that clause lightly. If you are not ready to commit to exclusivity, consider placing a portion of your inventory with Flycast or AdAuction until you determine whether exclusivity can work for you on a longer-term basis.

The other form of exclusivity — your wish for exclusive coverage within your product category — is a normal condition of rep relationships in much of traditional media. But it is not easy to arrange in the Internet arena. That’s because the large networks aggregate site traffic to enable media buyers to make the larger demographic buys, and category exclusivity won’t allow them to carry the category specific inventory the largest buyers demand.

Unless your site is both very large and in some important way unique, this form of exclusivity may not be in your own best interests. A major strength of third party sellers is the buyer access they get from controlling so much of the available inventory. Cut out that advantage, and you’ve seriously limited their effectiveness in your category. If, however, special features of your offering really demand category exclusivity, consider signing on with a more traditional web rep firm, rather than an ad network.

Additionally, take a look at the cost required to support your partner well. Are they covering marketing costs? (The big networks do.) Or are you managing these expenses? (Many smaller firms leave this to the site) Neither plan is right for everyone; just make sure you are clear on financial expectations going in. Misunderstandings in this area have caused more hard feelings between sites and their ad sales reps than any other single factor we have seen. While the percent of revenue the sales partner takes on each dollar sold is the data point most sites focus on, you’ll do better to factor into that number an understanding of what services and expenses are included, which you’ll fund.

Market coverage, capabilities and economics — all that remains of this complex decision process is a look at the legal and strategic issues. Join us next week to finish the sales partnership picture.

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