Reflecting on the Economics of Programmatic

The journey of programmatic advertising has been fascinating, and Index Exchange has enjoyed a front-row seat for each major wave of innovation along the way. We’re 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. Index 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 media owners so they can capture the billions of dollars in spend going to walled gardens; and we’re partnering with media owners to disclose fees so buyers can see the supply paths that maximise value for media owners.

The economics of programmatic

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.

Index assesses one single fee on each transaction conducted on our exchange. That single fee is negotiated directly with the media owners we work with 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 media buyers a choice in bringing their own economies of scale to the programmatic table in a way that assists media owners in driving up revenue and boosting working media dollars by lowering the amount Index 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 media buyers to drive down the fee Index receives from media owners on each transaction, passing those savings straight to the media owner.

How media owner transactions work today without XFR

When a media owner signs up to access the Index Exchange marketplace, we set a rate card that covers our single fee for transactions.

We calculate 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 media owner 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 media owner in the form of a net bid (versus gross), meaning the Index fee is taken out of the bid. This means media owners can compare the true ad spend they’ll receive at the end of the month from Index to bids from other exchanges with different fee structures. Ideally, the lower fee structure should win, so the media owner always maximises 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 that our single fee is always transparent.

How Exchange Fee Reduction (XFR) works

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

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

We’ll continue to send the media owner the net bid, which includes extra revenue from XFRs that helped lower their Index rate. As a result, the media owner receives more revenue from Index at the end of the month. 

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

Continuing fee transparency via reporting

We believe that every participant on the exchange should receive a receipt for their transactions that clearly discloses our fee. Our Client Audit Log (CAL)—which is widely in use today with hundreds of customers already reconciling their transactions in real time on Index 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 media owners 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, Index rate, net bid, and the final cost. Everything is processed line-by-line, transaction-by-transaction, and is 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 are we exploring the economics of programmatic and XFR? And how will this plan pass savings along to media owners? 

As a company, we aim 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 media owner. 

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 that budgets continue to grow in programmatic to help media owners thrive.

Our customers look to Index 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. XFR is a step in that direction.

We hope this clarifies our laser-focused commitment to innovating for media owners and the ecosystem at large. 

Mike McNeeley

Mike McNeeley

Senior vice president, product

As a major technology leader in the programmatic space, Mike holds nearly 15 years of experience in the online advertising industry. As senior vice president of product, Mike leads Index’s product division—overseeing the company’s product roadmap and direction, user interfaces (UIs), reporting, and technical industry group involvement—unlocking addressable buying opportunities across all screens and ad formats. Prior to joining Index, Mike worked at several technology companies including AppNexus, Yahoo! Search Marketing, and Right Media. During his tenure at AppNexus, Mike was responsible for the team that created and launched Prebid and, as well as the strategy, pricing, go-to-market, and roadmap for its SSP product.

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