Perspectives Product

Reflecting on the Economics of Programmatic

Reflecting on the Economics of Programmatic

The journey of programmatic advertising has been fascinating, and IX has enjoyed a front seat for each major wave of innovation along the way. We are reflecting on these innovations and the economics of programmatic. 

The first major wave of innovation spanned many years and focused on standards that led to the creation of OpenRTB to create scale and vendor choice. We then brought relationships into programmatic via Deal IDs and Private Marketplaces. Next, we enabled equal exchange access to inventory via header bidding so the waterfall could be rightfully put to bed (at least on the web).

The current wave is about making programmatic work better. IX advocated for and switched to a first-price auction to bring simplicity and transparency to all marketplaces; we’re working to unlock people-based advertising for publishers so they can capture the billions ($) in spend going to walled gardens; and we’re partnering with publishers to disclose fees so buyers can see the supply paths that maximize value for publishers.

But seeing the supply path alone isn’t enough. There’s one more concept in this wave swirling around that’s yet to surface. The innovation pulls from a simple economic principle whereby as marketplace participants choose to increase volume with an exchange, the exchange can offer incrementally lower fees on transactions.

IX has one single fee assessed on each transaction conducted on our exchange. That single fee is negotiated directly with our publisher customers and is often based on volume. We believe in the transparency provided by the single exchange fee model and plan on keeping it.

Looking forward, there’s another market participant whose volume-based decisions matter. We want to start to explore options that give buyers a choice in bringing their own economies of scale to the programmatic table in a way that assists publishers in driving up revenue and boosting working media dollars by lowering the amount IX receives as the volume of transactions go up. We view this as an opportunity for innovation.

To accomplish this, Index Exchange will be introducing a new program called Exchange Fee Reduction (XFR), which will enable large buyers to drive down the fee IX receives from publishers on each transaction, passing those savings straight to the publisher.

How Publisher Transactions Work Today Without XFR

When a publisher signs up to access the IX marketplace, we set a rate card that covers our single fee for transactions.

IX calculates the outcomes of all auctions and transactions based on this rate card. At the end of any given billing period (typically a month), we pay the publisher their cleared ad spend on the exchange, less that fee. 

All auctions (via the header, s2s or otherwise) return the best winning bid back to the publisher in the form of a net bid (versus gross), meaning the IX fee is taken out of the bid. This means publishers can compare the true ad spend they’ll receive at the end of the month from IX to bids from other exchanges with different fee structures. Ideally, the lower fee structure should win, so the publisher always maximizes revenue.

In reporting, we share both the gross bid as we receive it from DSPs, and the net bid, with all parties in the transaction to ensure our single fee is always transparent.

How Exchange Fee Reduction (XFR) Works

A buyer on the exchange (often a major agency) may now establish its own XFR based on their buying power. Exchange Fee Reductions will typically be tiered and volume-based, meaning the more the buyer spends on the exchange, the lower the IX fee to transact will become.

At the time of auction, IX will always have a rate card for the publisher and may now have an XFR for the buyer. As we assess the participants in any given transaction, we will identify if an XFR should apply in real time, and if the XFR can lower a publisher’s rate and provide savings – the lower rate is used automatically. 

image of a graph display of publisher review and savings from XFR

We will continue to send the publisher the net bid, which includes extra revenue from XFRs that helped lower their IX rate. As a result, the publisher receives more revenue from IX at the end of the month. 

There’s nothing for publishers to do to participate – if a buyer spends more and unlocks an XFR with IX on transactions, publishers will automatically receive benefits, and will see them going forward.

Continuing Fee Transparency via Reporting

We believe every participant on the exchange is owed a receipt for their transactions that clearly discloses our fee. Our Client Audit Log (CAL) — which is widely in use today (hundreds of clients already reconcile their transactions in real time on IX with this API) — will provide clarity on the financial dynamics and XFR savings for every transaction participant. The third party reporting solutions commonly used by publishers that are powered by the CAL, like those built by Staq, Switchboard, Ad-Juster and Adomik can also access this information.

All parties in each completed transaction have granular access to the breakdown of the gross bid, IX rate, net bid, and the final cost. Everything is processed line-by-line, transaction-by-transaction, and always 100% transparent. 

And API access to our impression audit logs is free – baked into our single exchange fee.

Motivations and Looking Ahead

To recap, why is Index Exchange exploring XFR? And how will this plan pass savings along to publishers? 

As a company, our mission is to support journalism and premium content, allowing it to reach the widest possible audiences. We plan to continue doing everything we can to accelerate this. By ensuring more of a marketer’s dollar goes to the publisher, we’re fundamentally helping to further this mission. 

We also believe in the value and support that many agencies offer to their clients. As marketers increasingly expect to drive outcomes and ensure more of their media dollars go toward working media instead of fees, we will make sure budgets continue to grow in programmatic (aligning with our mission to help publishers thrive).

Our partners are looking to IX to innovate and invest in the future. They want us to: continue to lead on alternatives to cookie-based advertising, expand into all channels and formats; and deliver an open and scaled alternative to the walled gardens. They also want us to offer price leadership in a way that will benefit all parties. Exchange Fee Reduction (XFR) is a step in that direction.

We hope this clarifies our laser-focused commitment to innovating for publishers and the ecosystem at large.  For additional updates, read our latest blog on XFR.