Value chain of the digital advertising business
Context and overview of digital advertising landscape
Why is digital advertising important? (src: statista)
- Globally search & video advertising grew +~40% YoY in 2021
- Most ad spending will be generated in the United States (US$261bn in 2022).
- Digital advertising is a ~$15bn industry in Germany (top 5th country)
- Search advertisement still going strong & video advertising is growing a lot
- Most important acquisition channel on the internet. Worldwide companies are investing more in digital advertising
History/development of digital advertising – biggest milestones (src: wikipedia)
- 1st spam email: 1978, a marketer from DEC (Digital Equipment Corporation)
- Online banner advertising began in the early 1990s as page owners sought additional revenue streams to support their content
- GoTo.com created the first search advertising keyword auction in 1998.
- Google launched its "AdWords" (now renamed Google Ads) search advertising program in 2000 and introduced quality-based ranking allocation in 2002
- Mobile advertising: Social media advertising, Video advertising vs television, etc. Facebook starts advertising in 2007
- Landscape and value chain of digital advertising
- Demand side of the business
- Advertisers: Has advertising goals (awareness, consideration, action)
- Agencies: Manage account, optimize setup, ad creatives
- Supply side of the business
- Network/ Exchange: Sells ad inventory programmatically and direct
- Publisher: Available ad inventory
- Demand side of the business
Perspective of actors in the digital advertising value chain
Advertisers
- For advertisers digital advertising is a channel to bring users/readers to their platform and in turn monetise their own business.
- Why digital advertising is more appealing than traditional advertising
- Measurable: Impact can be measured and can be continuously optimized
- A/B test allow for continuous improvement of business
- Metrics: Cost of acquisition, Cost per conversion, Cost per Click, Views, Impressions
- Targetability: Relevance the more effective the marketing
- Users can be targeted based on available information
- Levers: Geography, based on interests (verticals), age, …
- Customizability: Use of different creatives can be more appealing to different customers
- Search advertising is great to test MVPs for startups
- For transactional businesses
- Drive down the cost of acquisition
- Measure your product-market-fit
- For digital service businesses
- Test different versions of your software
- Measure the effectiveness of your onboarding journey
- Figure out what drive long term value for your users (retention)
- For transactional businesses
- Measurable: Impact can be measured and can be continuously optimized
- Why digital advertising is more appealing than traditional advertising
Ad agencies
- Ad agencies are managing digital advertising accounts of big multinational corporates and building expertise in how to manage and play multiple different ad exchanges
- Managing advertiser accounts for big companies
- Coordinating campaigns and managing advertising budgets for different goals/ marketing events
- Take care of creative management and creation for different countries and languages
Ad Networks and Ad Exchanges
- Ad Networks and Exchanges are marketplaces where ad inventory (supply) is offered to advertisers (demand) at prices that are depending on market dynamics
- Network: Brings multiple publishers together to sell advertisers an inventory mix
- For example: Google Ads, Facebook Ads, etc.
- Exchange: Trading ad inventory in real time with other advertisers
- How ads can be bought
- Programmatic
- Trades inventory at different prices that are programmatically determined (auction/bidding platform most common implementation)
- Advertisers can set a target/maximum bid they want to enter
- How can we better predict users behavior
- How to predict which ads to show
- Direct
- Advertisers buys ad inventory at a fixed rate and gets a guarantee to be shown
- Typical modes of buying: Cost per Day, fixed Cost per Impression
- Programmatic
- Problem of an ad exchange is how to find the maximum value
- User/Reader: Maximize the usefulness of an ad
- Ad Exchange: Typically is only paid by advertisers when marketing goal is achieved (clicks, impressions, conversions)
- Advertiser: Wants to achieve marketing goal
- Ad auctions create a fair competition that tries to maximize the value for the ad exchange
- Ad auctions work in the background to maximise the value for the ad exchange
- Function for maximising value in ad auctions:
- [Total Value] = [Advertiser Bid] x [Estimated action rates] + [Auction Rates]
- Network: Brings multiple publishers together to sell advertisers an inventory mix
Publishers and Social networks
- Publishers and social media platforms perspective
- Monetisation through ads is an important income stream for digital businesses
- Ads allow to maximise accessibility to content
- Every user/reader pays the same rate with attention
- Stable income stream when attractive information is presented
- Publisher control important aspects
- Formats of ads to show, ads categories to show
- Feed ads, search ads, display ads, video ads, …
- Ad quality and user annoyance
- Effect on churn and user retention: Are the ads that we are showing worth the effect on the user?
- How many ads do we show? Where do we show ads?
- Social networks as a platforms with multiple stakeholders
This post is my personal opinion and perspective