The Marketplace Appreciates Obfuscation in Pricing

Posted by Darren on Apr 22, 2010 • (Comments)

OpenPricingPricing is defined as the property of having material worth. Pricing though does not dictate individual value, but rather the value of a good for the average.  Let me illustrate by an example:

Sherri walks into CVS to purchase some shampoo for the Herman household.  She sees Pantene for $6.45/bottle or Sunsilk for $9.99/bottle (totally made up numbers).  Sherri has a specific price in mind she wants to pay for Shampoo based on her proprietary valuation system (special needs, bottle shape, accessibility, etc) and based on this specific value, she is able to decide between Pantene and Sunsilk.

Pantene and Sunsilk are offering (pricing) their products at these price levels because they have done a comprehensive supply/demand curve and have optimized where they should price their product for the optimal (not always most) amount of buyers.  This is done through market and competitive research as well, as, historical sales scenario planning data.

In this scenario, the marketplace appreciates pricing obfuscation:  it’s simple for the consumer and it’s simple for the business.  The consumer never sees the profit margins (unless they are purchasing from a public company and even then, how many consumers read financial reports) and the business never knows how much the consumer was really willing to pay (potentially more).  There is not really a tension here – if a product’s price is not adequate for a consumer, they will move onto the next product on their list.

It’s simple.

For the media/advertising world, things are changing.  A once very opaque industry is changing.  Agencies and brands are becoming much more quantitative and are understanding how to value inventory for the first time (I took liberty for “first time”).  Most publishers do not appreciate this – and the obfuscation/opaqueness that once existed that provided healthy margins is dissipating.

Let me reprhase the last sentence:

Most publishers do not appreciate this in the short-term.  Historical obfuscation of pricing/valuation has lead to healthy margins that have existed for years (why do we have 3 Martini lunches? Why are media teams making custom nike sneakers with reps?) for the sell side.  The long-term opportunity is tremendous, if the sell side could get over the initial short-term shock.

Some say that the bigger they are, the harder they fall.  The problem with this is that the major media companies such as Conde Nast (Advance Publications), Hearst Corp, and Tribune are all very large private companies and are potentially going to fall very, very hard.  Note:  I’m not saying that they cannot get back up again… They can.  But they are going to have to fall first.

If/when major media buyers (marketers, agencies grouped together) have the ability to buy on value, not price en mass, this will be a major market shift.  Some of us are here today but when even more of us are here tomorrow, the sell side will become much more comfortable as more dollars move into the industry to satiate cash flow statements.

Since however the market appreciates obfuscation in pricing (it’s just plain simple!) we may never get to this efficient place, but it would help the actual buyers and sellers reap much longer term benefit that short-term margins.

Please comment below to continue the conversation or tweet @dherman76 with replies

Tagged as , , , , , , , + Categorized as Advertising & Marketing, Internet & Web X.0, Startup & Venture Capital
  • I actually think this is really a gross over-simplification of a greater behavioral economics discussion that includes price elasticity and price discrimination but it is a good discussion nonetheless

    Bunch of people have been talking about the de-averaging of pricing for awhile now, thats all RTB really is... I agree that you have to ultimately de-average the value (not the price) of the impressions but I'm not sure it benefits the buy side to de-average the actual cost. Specifically, it doesn't benefit people with technology to pay de-averaged prices as the cumulative cost for the set of desirable impressions may be more expensive than buying in bulk due to increased competition for that set of impressions along with irrational buying activity. Price discrimination will always benefit the seller, not the buyer so lets be careful what we wish for.

    The notion that any unsold impression is "remnant" has allowed those with technology, data expertise, organizational alignment etc. to buy these under-utilized impressions at discounted bulk prices, transform them into something more desirable with greater value and resell them to someone else at higher rates. It is important however to distinguish the players who do add value from those who just arbitrage.

    When buyers start to compete for a set of desirable impressions we create upward pricing pressure on those impressions. We cannot discount irrational buyers who will drive up overall cost even further because even those with access to more complete information will not always act in a way that is obvious to the overall market because of its own motivations which are not public, its the practically of game theory discussion.

    This does all point back to a post that you made a number of months ago about data valuation however, I wonder who in the industry is pretty good that stuff...
  • jneumann
    Agree that knowing what the inventory is really worth (on both the buy and the sell-side) will completely change the landscape. And I think that, at this point, knowing real value will benefit publishers even more than marketers.

    If the old media started to: sell inventory based on its true value to marketers, create virtual demographic consolidation, use quantitative marketing techniques to serve up the right content to the right reader, etc., then they might be able to overcome their legacy cost base to return to viability (although not to the days when the Hearsts et al made a fortune by owning the printing presses.)
  • Makes sense. What is creating virtual demographic consolidation? Do you mean publishers should aggregate audience on the sell side, instead of leaving the buy side to aggregate audience through exchanges?
  • jneumann
    Magazine CPMs are determined in part by the cohesiveness of the magazine's demographic. Magazines court this by having well-defined subject areas (i.e. American Iron) or by excluding readers by having a high cover price (ie. Hamptons Magazine.) The same thing could be (is?) accomplished virtually by publishers,
  • Nice post.

    Exchanges have introduced a big shift in pricing information availability. With traditional direct buys, buyers and sellers only know the clearing price or market value of a transaction if they execute the contract. You only know the price of what you buy/sell yourself. Now with exchanges, you learn the clearing price even if you don't win the auction.

    The market structure for direct buys allows media buyers, especially large consolidated media buying enetities, plenty of pricing info, but they don't use it because of organizational failures. Unfortunately, media buyers generally don't have good business intelligence systems. The existing pricing data isn't aggregated and made available to individual media buyers who are negotiating. The failure to leverage direct buy pricing data has less to do with market structure and more to do with transaction processing routines. When you cut paper IO's, the pricing data is locked up in unstructured data stores --- uniquely formatted Excel media plans and signed PDF IOs. The data might be available in a structured form in Atlas or DART, but these companies never added an attractive business intelligence layer on their adserving platforms.

    The fact that exchange based buying is processed via API's rather than email and fax, allows pricing to be aggregated, analyzed and leveraged by buyers. IMHO, this more mundane shift in transaction processing will have a bigger impact on how data is used than the shift in market structure allowing non-transactors to discover pricing.
  • The incremental shift even from taking unstructured pricing data for direct site buys to structured data will increase effectiveness and efficiencies by a %. A couple of points here and a few there, they all start to add up.

    When you go into real time price observation and discovery, this is where hills start to look like mountains in terms of gains... if your system can enable + you can action it.
  • Good points and largely agree with you (and Jonathan) that the future will be a bright place for publishers when they can properly unlock the value of their audience and data. We're pushing to get them there sooner rather than later.
  • What are you finding that is working/not working?
  • We are seeing 'audience extension' initiatives working well for the types of publishers you'd imagine it would be good for. We start seeing really good things if you can segment the pub's site, and then leverage the off-site messaging with sequential creative.
  • Great stuff. For pubs the transformation is that they are all now in the data business. Without analytics that can understand segment level values of visitors they are toast. I touched on this a bit from the publisher perspective in my post yesterday: http://bit.ly/deJCty. As you know, I'm know working everyday on figuring these things out. When pubs crack this code, lookout. You'll see pubs get into the arb game and as you said, the long-term opportunity is tremendous.

    The demand side will be fascinating to observe. No question pricing transparency (and its big sister Data) are going to provide much more efficient media spending and higher returns. It will be very interesting to see how this plays out. If we've learned anything from Search it is that in order for this to work out well the industry needs to go-wide. Scale is key. Many more advertisers will be needed to fill the media gaps created by better data and price efficiency. Search has 2.5 million advertisers filling those gaps on the keyword level. Display has 50,000. That's not enough. This is a large reason why I think Google has a legitimate chance to eat up the channel - they can fill those gaps and they have their own pricing and data systems already. Be afraid.
  • personally, i think search & display combine in the commodification of standardized units. tv, print, radio, ooh also are bought this way. data is key (not just 3rd party) and where the west will be won is on strategies. google may "win" the "single largest repository" of media, but google will always be a inventory source and won't be strategic to the "big idea" unless they continue on their world dominating direct to client strategy or start acquiring some agencies. I wouldn't count either out.
  • Darren - interesting concept - do you see this as another psychological step towards making media a commodity?
  • For standardized buys, I didn't realize it wasn't a commodity?:)
  • Here is a hypothetical scenario - two sites - exact same size and audience composition and "interaction rate" - commodization theory places equal values on an impression/exposure on both sites - but what if one site is ESPN and the is Adult Friend Finder, are they still equal? That is an extreme example to say the least. You could look at it the same way using behavioral targeting cookie data, two exact people profiles - Maybe I am naive, You and I need to grab a drink together - so that you can teach me. I'm buying!
  • If it's Shirley Temples, I'm in. If we're being conservative, I'll take a scotch.

    As for the evolving famous ESPN vs. AFF argument - there will be a value associated with advertising on each and depending on which one provides enough lift in associated metrics (placement, size of unit, time of day, day of week, audience, frequency, etc) for a particular brand and campaign.
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