This is not unlike the “lean startup” approach described by Eric Ries in his book, The Lean Startup. In it, he advocates the “build-measure-learn” cycle, which puts experimentation, measurement, and learning at the heart of the organization — the goal being to figure out how customers respond to a product before dedicating larger resources toward its development.

The reason why this approach is popular among comedians and start-ups alike? It’s far less risky to go big when you know what works based on prior first-hand data.

We will now discuss a similar framework for approaching display advertising from a “lean” marketing mindset. By using real-time bidding (RTB) as an efficient means to experiment with campaigns and gain insights prior to scaling with direct buys, marketers can figure out the most successful elements of a campaign prior to allocating larger budgets.

Let’s dive deeper into the four strategic phases of this lean display advertising approach:

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Phase 1 – Build Your Test Campaigns

“Never stop testing, and your advertising will never stop improving.” —David Ogilvy

The goal of the first phase is to create various campaigns aimed at a variety of potential audiences to see how each responds. This is where baseline data is gathered for further analysis. By creating a series of well-crafted test campaigns (i.e., experiments), it’s easier to learn from them in the analysis phase.

There are several keys to the testing phase, the primary ones being:

• Tracking
• Segmentation
• An ample variety of ads

In terms of tracking, you want to properly measure your campaigns. Measurement is extremely important when it comes to analyzing and optimizing your campaigns, which are the keys to extracting the highest value from them. It also sets the stage for intelligently scaling up your campaigns in the future.

To do this effectively, make sure that you are tracking as many variables as you can. At the very minimum, you will want to track conversions or desired actions (preferably with an associated value). In an ideal scenario, you’ll want to track not only conversions and revenue, but the impact of campaigns on brand searches, view-through conversions, bounce rate, landing page engagement, and even lifetime value.

With respect to segmentation, this simply means properly defining the scope of each campaign. You can’t assume that audiences in different regions, age groups, or income levels will respond to the same ad, on the same website, in the same way. This is why segmentation is important: control the variables to make for better data.

Lastly, having a wide variety of ads within your campaigns is the key to enabling good performance comparisons. If you create many nicely segmented campaigns, but they all use the same standard banner ads, you miss the opportunity to split-test the impact of multiple ads with each of those audiences. Having variety enables you to increase the amount you learn from your campaigns.

Phase 2 – Analyze The Data

The second phase is where you measure, analyze, and learn from the data that was collected in the first phase. In order to extract insights from your campaigns, digging into the data on different levels is crucial.

Some key areas to analyze in this phase are the engagement and impact of:

• Your ads on a placement level, site level, and in aggregate
• Visitors from specific regions, on certain devices, at certain times, etc.
• Specific websites and placements in general
• Specific audiences in general

When analyzing the data, you should be able to discover which combination of campaign elements and audience factors show the most potential, and which need to be pruned in the optimization phase.

Phase 3 – Optimize Your Campaigns

Once a proper set of data has been collected and analyzed, it’s time to cut the weak elements from your campaigns and allocate more resources to the elements that are working. This is the goal of the optimization phase: to improve your campaigns by using the insights learned from the previous phase and applying them in a meaningful way.

One example of how to improve a campaign is to disable or prune certain elements — such as ads, placements, or sites — if they are found to be under-performing. This allows the elements that perform well to receive a larger share of resources, thereby improving overall campaign effectiveness.

Another way of allocating more resources to elements and campaigns that work is by increasing budgets, bid prices, and frequency caps (incrementally) in order to drive more volume.

Optimization should really be viewed as a continual process of learning from the data and improving campaigns over time. Once you have optimized campaigns on your hands, the next logical step is to scale them up.

Phase 4 – Scale Your Winners

“What enables the wise sovereign and the good general to strike and conquer, and achieve things beyond the reach of ordinary men, is foreknowledge.” —Sun Tzu

It is only after you have acquired real-world data (foreknowledge) that the time becomes right to invest the effort and dollars into scaling your campaigns with direct media buys. Here is where the complementary nature of RTB and direct buys reveal themselves to the advertiser.

We already know that buying display ads with real-time bidding (RTB) is more efficient, so your initial testing and optimization are best conducted on agile platforms that enable you to exploit the benefits of RTB. Armed with your insights, you can now confidently approach publishers to reserve more inventory.

Imagine the following conversation with an ad sales team, where you say:

“Your inventory is performing well for us via RTB. We are paying around $2.50 eCPM, but we would be willing to pay a slightly higher rate, or commit to a certain order size, to reserve more inventory directly.”

The publisher’s ad sales team might then say:

“We’ve only been putting a fraction of our inventory on RTB, but for a monthly commitment of $X dollars at $Y CPM, we could probably guarantee Z million impressions per month for you.”

Savvy publishers are already well aware that RTB is great channel for prospecting direct sales. If a specific website or publisher is performing well for an advertiser through RTB exchanges, there’s a good chance they want more of the same inventory. Knowing the inherent volatility in RTB volumes, approaching publishers for direct buys (after testing, of course) only makes sense.

A note of caution: this may not always be a practical course of action. While exploring direct buys, you may notice that CPM rates exceed a level that is feasible for reaching your performance goals — so always keep your key metrics in mind.

In any case, buying display ads via RTB is an ideal way to gain knowledge and test out the performance of specific publishers and audiences, without blindly committing thousands of dollars on high-CPM direct buys. Once you’ve discovered valuable placements, you can then approach the publisher directly to reserve your own inventory on a guaranteed basis.

This strategy enables advertisers to build impactful display ad campaigns, all while minimizing risk and wasted resources, and maximizing the amount of learning in the process.

The process that a marketer must follow, however, to reach that end goal is very different depending on the approach, and each has its pros and cons. To help you understand which approach may be best for you, we’ll begin by contrasting some of the characteristics of traditional direct buys and RTB, and what they mean to brands, agencies and marketers.

1. Targeting – Websites Vs. Audiences

If there is one thing you need to remember, this is it: The fundamental difference between direct buys and RTB is the shift from buying ad impressions in bulk (direct), to auctioning each impression off individually to the highest bidder (RTB).

With direct buys, you are essentially buying impressions in bulk, in order to have your ads seen in a specific context (e.g., on ESPN.com). You have the ability to filter the audience that sees your ads with targeting rules such as geography or browser type, to name a few of the basics, but you’re still ultimately targeting your ads to a specific website.

This works especially well for brand advertisers and agencies that are very sensitive to the placement of their ads, and are willing to pay premium prices to secure such inventory. Brands are also afforded more freedom on the creative level when working directly with publishers. Rich media formats, like page takeovers and other types of custom brand integrations, are currently a luxury only possible with direct buys.

With RTB, each impression is profiled and evaluated in milliseconds during the auction process (while a page loads). You can target ad viewers at a demographic, psychographic and behavioral level, but the reach of RTB enables you to do so across a wide array of sites, rather than on just one, making it possible to target audiences at scale.

So, instead of being limited to buying ads on ESPN.com to reach your audience, RTB allows you to buy ads on (almost) any site that “sports fans” may visit. You also have the ability to take a more agile approach to campaign optimization, since each impression is being bought individually, allowing for more efficient performance and control.

Everyone wants exposure to the right audience, which is why this approach works well for almost all advertisers.

2. Supply – Guaranteed Vs. Non-Guaranteed

Another fundamental difference between direct buys and RTB is the level of certainty that your ad campaigns will receive the volume you want or need.

With direct buys, you agree to buy a heap of ad inventory at a fixed CPM rate that the publisher will deliver in the future. In that sense, the inventory is “guaranteed” or “reserved” for you. Barring any external issues, you will receive the impressions you agreed to purchase at the outset.

This works well for advertisers and agencies that have specific exposure goals and require a high level of certainty that campaigns will deliver. In exchange for paying a higher rate to the publisher, you get certainty of campaign volumes and avoid the naturally competitive landscape of RTB.

With RTB, as the name implies, you are in an auction with a multitude of other advertisers, all bidding at different rates (explained later) for each impression, in real time. In such a dynamic environment, the ad inventory is considered “non-guaranteed,” due to the unpredictability of the marketplace.

When you don’t know what other people are bidding, there is simply no guarantee that you will win the impression you bid on. Furthermore, guaranteed buys usually have priority over RTB. This means, if the demand for guaranteed inventory on a particular site increases, the supply available on RTB for that site correspondingly decreases.

3. Workflow – Manual Vs. Programmatic

Another difference between direct buys and RTB is the workflow of launching campaigns.

For the most part, direct buys consist of a manual process that involves hours of human effort in planning and execution (pdf download). It requires reaching out and making initial contact with the publisher’s sales team, negotiating and planning the “insertion order” (a contract outlining the terms of the ad campaign), emailing ad tags back and forth, and so on, all in preparation to launch.

The publisher ultimately controls the flow of the campaigns using their ad server, which means that there is a natural delay when it comes to campaign control and reporting. This asynchronous process is not only prone to miscommunication and human error, but also requires hours of human time on something that could be handled instantaneously with a programmatic solution.

Then, there is the issue of management complexity. Take the traditional media buying process – negotiating a direct buy with a publisher, and working through all the setup – and try multiplying it by ten or twenty. Now, imagine the complexity of having to run them simultaneously, like an agency would, and you quickly realize the overhead required for management alone. Not to mention the process of negotiating with various sales teams, which is an art in and of itself.

In contrast, RTB is a primarily programmatic process driven more by user interfaces and algorithms, and less with phone calls, emails and contracts. There are still manual elements (such as ad quality review, tech support, and billing), but nothing close to what is necessary when dealing directly with publishers — let alone a group of them.

As a result of the programmatic process, more of the campaign components are real time (i.e., nearly instantaneous) in nature, from controlling the flow of campaigns, to reporting and optimization.

To be clear, even though RTB is a programmatic channel, that does not mean that direct buys won’t eventually enjoy a programmatic future. There are several ad tech vendors out there giving publishers the ability to offer programmatic access to inventory on a guaranteed basis, all while maintaining control over pricing and ad quality. These technologies have yet to reach critical mass, so for the time being, we should probably keep direct buys in the “manual” workflow category.

4. Pricing – CPM Vs. eCPM

Another primary difference between direct buys and RTB is the nature in which inventory is priced. This difference stems from the fact that with direct buys you are buying impressions in bulk; whereas with RTB, you are bidding on individual impressions separately.

Direct buys are almost always priced in fixed CPM rates, where the inventory is sold in bulk and all impressions are essentially priced the same (e.g., $10 CPM, or $10 per thousand ad views). This pricing model has been the standard since the inception of the banner ad, and doesn’t look like it will be going anywhere in the foreseeable future.

With RTB, each impression is auctioned off. Since each impression is priced individually (and since a cost-per-impression metric would be wildly impractical to advertisers from a reporting perspective), the de-facto metric for RTB pricing is effective CPM or eCPM.

Another way of thinking about how these two pricing models differ is by using an analogy like apples. Buying ad inventory directly from publishers is like buying giant bushels of apples. You pay a fixed price for each batch, and receive various levels of quality within the bunch.

But with RTB, you are essentially bidding for each apple (impression) based on its individual characteristics. This means that you still end up with 1,000 apples at the end of the day, but the overall cost for the batch will be a dynamic value derived from all the individual prices you paid for each – hence the term effective CPM.

5. Accessibility – Barriers To Entry

The final difference we will cover between direct buys and RTB is the accessibility of each approach. Given the “traditional” nature of direct buys, they typically have much higher barriers to getting started compared to RTB.

The first barrier faced by marketers performing direct buys is the sizable minimums in ad spend required by most publishers to get started. In general, you can expect a commitment of at least $5,000-10,000 for a direct buy of guaranteed inventory.

On much smaller sites, you can get away with paying flat rates of a few hundred dollars. For larger publishers with attractive inventory, you won’t get any attention unless your budget is in the 5- to 6-figure range. To many small- to medium-sized marketers, this can be a non-starter.

Remember: this is considered “premium” inventory in the eyes of the publishers, so don’t be surprised when you hear the CPM costs and minimum spends. The truth is, when going directly to the website publisher, there is an unspoken rule that all prices are negotiable, so website publishers will often quote surprisingly high rates. It’s not uncommon to receive rate cards anywhere from $10 to $75 CPMs (and beyond!) from many ad sales teams. Such rates can be completely impractical for anyone but large brands.

Serious media buyers also need to consider the costs for an advertiser-side ad server. If you are managing direct buys from multiple publishers, you want to be aggregating and auditing your own numbers, in case of reporting discrepancies. You also want a central place to log in to and reduce the complexity of logging in to multiple publisher ad servers.

I can elaborate on this point in a future article, but for now, it’s important to understand that with direct buys there are extra costs associated and technical learning curves to overcome that may not be obvious at first thought.

As opposed to direct site buys or buys through large ad networks, which have higher barriers for marketers to get started, buying RTB inventory through a DSP (depending on the one you choose) has a much lower barrier in terms of financial commitments and operational management. Obtaining an ad server also isn’t necessary, since DSPs provide the ad serving and publisher integrations on your behalf. So, for the marketer, there is far more control and far less friction in the media buying process in a programmatic RTB environment.

Moving Forward

While buying ad inventory directly can be inefficient (not only from a price perspective, but also operationally), it does provide a number of benefits, which make these hurdles palatable to certain types of advertisers. RTB overcomes these pricing and operational problems, but introduces its own: guaranteed volume.

Hopefully, we now have a clearer picture of the differences between direct media buying and real-time bidding. Keep in mind, it’s quite possible to use both approaches in a complementary way, but it requires a data-driven mindset and a methodical approach to optimization and scaling. Moving forward, we will discuss these methods so you can apply them to your own display ad strategy.

To those with experience in the RTB realm, it’s well understood by now that there is an element of unpredictability and fluctuation in the availability and consistency of volume from specific publishers or sources of ad inventory. This can often lead to frustration, especially when trying to optimize and automate your campaigns.

To appreciate why this happens, it helps to understand how ad inventory becomes available in the RTB ecosystem, how direct sales orders (aka insertion orders) affect the amount of inventory available, and the interplay between the two sales channels for website publishers.

The Publisher’s Dilemma

Website publishers are in a tough position. They have a strong desire to increase their advertising revenue with as little headache as possible. For publishers needing a quick revenue solution, outsourcing the whole process to Google AdSense has typically been the easiest way to go. The problems with AdSense, however, are that it’s restricted to buyers on the AdWords platform, the revenue model lacks transparency, and the revenue yield to the publisher is low.

More savvy publishers — often with larger amounts of traffic and higher revenue goals — either turn to selling their inventory directly to advertisers through direct ad sales, or by outsourcing it to an ad network that handles it on their behalf. Direct ad sales typically yield the highest RPM (Revenue Per Mille — or revenue per thousand pageviews) for publishers, especially if their inventory is highly sought-after. Direct sales usually require more technology, like an ad server, as well as people to handle ad operations (like setting up campaigns, updating creatives and managing clients).

The downside to this process is that it’s very inefficient for both publishers and advertisers: it requires numerous manual tasks, such as negotiating and transmitting contracts, trafficking campaigns, billing, and so on. Despite these challenges, publishers continue to prefer direct ad sales for the simple fact that this yields the highest revenues.

Yet, most publishers are unable to sell off their inventory directly. So, what to do with this unsold (or, in industry-parlance, remnant) inventory? The answer, traditionally, was Google AdSense (which makes this unsold inventory available to AdWords advertisers). But, now it is possible for publishers to expose their unsold inventory to the RTB ecosystem to auction it off indirectly to the highest bidder, getting the highest RPM possible.

Revisiting Session Depth

In my last article, which discussed the mechanics of real-time bidding, I touched on the subject of session depth and how the first impressions seen by the RTB channel are merely the first impressions after direct sales orders have been fulfilled.

As we can see in the illustration above, the lowest possible session depths are always served through direct ad sales along with the true first impressions. Moreover, in the fictional example above, if the average visitor accounts for less than 10 pageviews, then the chance of them being available to the RTB auction becomes very low. In practice, it is entirely dependent on the order sizes and campaign rules of direct buy advertisers.

Flux In The RTB Ecosystem

This natural dynamic between direct and indirect (RTB) ad sales creates an inevitable fluctuation in inventory volume for the RTB ecosystem.

For example, during peak advertising seasons like Christmas, the influx of advertising dollars, especially in the direct sales channels, creates lower volumes of inventory in the RTB channel. In some cases, publishers effectively “disappear” from the RTB ecosystem completely if their entire inventory gets pre-sold from direct deals. After all, display ad space is a finite and ephemeral commodity online.

During the last holiday season, there was a drastic spike in the cost of RTB inventory following Black Friday. In that case, the increase of advertising dollars went beyond the direct sales channel and spilled over into RTB, causing the increase of eCPMs across the board.

That combination of lower inventory volumes with higher inventory prices forced marketers to drastically increase their bids in order to compete for what was available, making it challenging for many performance-based marketers to maintain their volumes and ROI.

Continuing The Discussion

I hope this provides some clarity as to the relationship between these two different sales channels, and the economic motivation that drives publishers to segment their inventory in such ways. In my next article, I will continue to discuss the differences between these two approaches to display advertising and how these differences impact marketing strategies.

The answers are actually interrelated, and require an understanding of the mechanics behind how real-time bidding (RTB) works.

Industry Terminology Explained

First, a clarification of some industry terminology. The first page that a visitor views — more often than not the home page — is called the “first impression.” The second page is the “second impression,” and so on.

Since most advertisers covet lower session depth (session depth refers to the number of pages viewed by a visitor in a particular viewing session, with lower depth corresponding to earlier views), publishers will often sell these impressions in bulk through direct deals with advertisers. Impressions that are not sold through direct deals (usually those with a higher session depth) are sold through RTB to the highest bidder.

Let’s take the fictional example below:

Three advertisers bid to show their ads to a specific website visitor on a particular site. Now, let’s say that this visitor views nine pages on the site before leaving, and all nine impressions are sold using RTB.

The 1st impression will be sold to the advertiser with the highest bid. Since RTB operates on a “second price” auction model, the amount paid by the winning bidder will always be $0.01 more than the second highest bidder. Now, our website visitors loads a 2nd page on the site.

This 2nd impressions is once again sold to the highest bidder, using a second price auction. This process continues each time our website visitors opens a new page.

Frequency Capping & RTB

But, let’s say that our advertisers have capped the number of times they want to show an ad to a particular visitor. Once that “frequency cap” is reached, they will no longer bid on available impressions. In our example, advertiser A has a cap of three impressions per 24-hour period. So, when our website visitor opens the 4th page on the website, advertiser A will not bid on the impression. This allows advertiser B to win the impression, at a price $0.01 greater than advertiser C’s bid price.

What does this mean for advertisers? For one, the advertiser that bids most will always have their ad shown first. While this may seem intuitive, it has important implications for an advertiser’s bidding strategy. Higher bids should result in lower session depth, and lower bids in higher session depth. But, higher bids should also yield a greater number of impressions.

Some website visitors only open a few pages on a site before leaving, and will never get to the session depth at which a low-bidding advertiser can expect to win an impression (especially if other advertisers have higher, or no, frequency caps). An advertiser with a lower bid price, therefore, can expect to win not only higher session depth impressions, but also fewer of them.

RTB is very fluid and dynamic, and it is difficult (if not impossible) to model the behavior of all other advertisers bidding on a particular impression. But, as shown above, the basic rule of auction bidding appears to hold true: if you want the best quality inventory, and the greatest volume of impressions, bid high!