What's the Real Deal with Real-Time Bidding?

Over the last year, the emergence of real-time biddable marketplaces for ad inventory has roiled the online media industry and revealed a potentially disruptive channel in the digital marketing landscape. As Mike Baker noted in a column on the topic, in fact, real-time biddable inventory has the potential to revolutionize the ad industry on the buy-side and sell-side alike. Those familiar with Clayton Christensen’s, “Innovator’s Dilemma,” will recognize both the threat and opportunity in this disruptive new technology. And agencies and marketers alike are retooling processes, teams, and states of mind to make sure they are not left behind.

The forces reshaping the media landscape and bringing real-time bidding discussions to the forefront have little to do with “real time” anything. Currently, RTB inventory represents a small fraction of the overall media inventory traded daily across ad exchanges. The best estimates I’ve seen indicate 5 percent to 10 percent of biddable, exchange-traded media is purchased through real-time bidding today. But by all accounts exchange-traded media is working, and working well. At our agency, for example, we find exchange-traded media among our most efficient channels, often performing at comparable levels to search marketing from a direct response standpoint.

So if “real-time” bidding isn’t driving this success, what is? The answer is clear: micro-segmentation and de-averaged pricing, neither of which need to be done in real time to be effective. (Here’s how de-averaged pricing works: Instead of paying a single price for one lump segment, you break the lump segment into its component parts and pay a unique price for each of those parts. This represents the “de-averaged” price.)

Neither segmentation nor de-averaged pricing are new concepts, the former familiar to anyone with even a casual interest in marketing. But until the emergence of exchange-traded media and API-based buying platforms, executing in-depth segmentation, or micro-segmentation, in online media buys was exceedingly difficult. Consider, for example, a media planner trying to target five distinct audience groups in 100 designated market areas (DMAs) over five different day-parts. That’s 5,000 distinct segments. Though it’s possible to break out each of these segments distinctly, and track and analyze them uniquely, it’s also exceedingly cumbersome and time consuming. And thus it is seldom done at all. Rather, these 5000 segments are lumped into 50, five, or even one big “lump” segment for the sake of simplicity and expediency.

De-averaged pricing, too, is fairly straight forward. In the example, above, the aggregate “lump” segment that combines five distinct audience groups in 100 DMAs over five different day-parts would be dissected segment by segment and priced according to the expected value and expected return of each segment. Instead of one CPM (define) for our “lump” segment, there are 5,000 unique CPMs for 5,000 distinct segments. De-averaging across segments allows buyers to invest more in the segments that work, and invest less (or nothing at all) in the segments that don’t. This is an incredibly powerful optimization technique, and one that until recently was beyond the tactic means of most marketers and agencies.

While micro-segmentation and de-averaged pricing are new concepts for display media buyers, search marketers have lived with these concepts for years and exploited them with great success. But if display is becoming more like search, again, it is not due to the emergence of real time bidding. In fact, RTB does not yet exist in the search marketing landscape, at least not on the buy side. At most, search marketers bid on an hourly basis, but active bidding with such frequency is rare. More likely, bids are adjusted daily or intra-weekly. It’s not the frequency of bidding, but keyword segmentation that is the most important performance lever in search marketing. And aligning prices against that segmentation is the hallmark of effective bid management. This is micro-segmentation and de-averaged pricing in action, across the largest and best performing segment of the online advertising market.

Real-time bidding, for sure, represents an opportunity to extend micro-segmentation and price de-averaging to the extreme (each impression its own segment, for example). But, marketers and agencies should be clear on where, specifically, value is created; it is segmentation and pricing that will make RTB a success. It’s those who develop a deep understanding of customer segmentation and de-averaged bidding strategies who will ultimately win in a world where RTB is, in fact, dominant. And until that time they can use the tactics of micro-segmentation and de-averaged pricing to drive greater efficiency, reduce waste, and reap immediate dividends.