The Supply and Demand Problem in the Online Advertising Industry

Marc DfouniBy Marc Dfouni

Usually, a lack of competition in almost any industry means that any given company within that industry is afforded the freedom to charge higher prices. So, why is it then that in the Online Marketing industry, given that competition is still fairly low, prices remain consistently low as well? That is not to say that all prices are low; there is in fact a large variation of pricing available, yet they generally have remained on the lower side.

In order to understand the reason for this, it is important to have an adequate understanding of the general procedures that occur between companies (buyers) and the online marketing experts who work with them. When online marketing companies are first contacted, the company contacting them usually has a good sense of what their goals are. The potential buyer expresses their needs and then a negotiation takes place between the buyer and seller. The buyer and seller eventually come to an agreement… if the price is right. Unfortunately, since all of these negotiations take place behind the scenes, it is virtually impossible to know which online marketing company the buyer will ultimately end up getting the business.

Considering this type of “behind-the scenes” activity, we can see why this would create problems for the online marketing sellers when pricing fairly and accurately. Since they have no clue as to what the other companies are offering, it becomes extremely difficult to set up and maintain a competitive pricing. Therein lies the reason for the huge discrepancies between the success and pricing among respective online marketing businesses.

Of course, one does need to take into account that not all packages/services offered are the same. So, depending in what your needs are, the prices will inevitably vary. Some packages are of much higher value than others. Due to this, many companies tend to combine lower-valued services with higher valued ones, allowing the cost of lower-valued services to rise. Once again, this creates problems in that the buyers can still be either overcharged or undercharged and would never even know it.

Unlike television, where advertisers compete for prime time slots, there is no such thing in the online advertising industry. The advertisers on television all know exactly what they are competing for and the same goes for the buyers. Since several buyers are negotiating for the same thing at the same time, both parties can achieve the best possible price much more quickly.

Is there a solution?

Some have suggestion that the only way to remedy the current ongoing discrepancies within the online advertising industry is to implement some sort of auction type channel where ideally, there could exist real time bidding. This way, buyers would get to see exactly what prices they are dealing with. Unfortunately, the type of technology that it would require does not yet exist but they are other methods that could help as well.

For example, having a regular inventory action where sellers would explain their services and bundles and interested parties would simply bid on them. This would at least take away from some of the covertness of how this type of business is being dealt with as of today. There is still one drawback here in that not all of the inventory would be sold in the end, leaving these companies in much the same predicament as they were before.

The next logical step would be for online advertising companies to sell their services in a cascading auction. The difference here is that, in most cases all the business (or at least, most of them would have the opportunity to gain new clients). If the starting auction were to last one month, for example, all inventory that remains unsold would go on to participate in the next months auction and so on. Ultimately, the remainder would be then sold in a real-time auction. In such a case, several different buyers would be in competition for the same exact inventory, allowing for much fairer competition and much more successful pricing results (for both the buyer and the seller). Sellers would also have the opportunity to participate in more than one auction at a time, also increasing their chance of winning a client or more.

That’s one option… Can you think of any others?

*This article was inspired by Eric Picard's article: Supply and Demand in Online Advertising