Ad Inventory Shortage: Problems And Solutions
Gil Lahav

As online advertising expenditures continue to grow at a record-breaking pace, the difficulty of predicting and managing the supply and demand for online ads is likely to become increasingly felt. According to a recent statement issued by the Interactive Advertising Bureau, online advertising revenues in the United States "for the first six months of 2006 were approximately $7.9 billion, a new record and a 37% increase over the first half of 2005." While publishers stand to earn huge profits from this consistent growth trend, they face considerable challenges when trying allocate their limited inventories as effectively as possible.

TABLE OF CONTENT
What is online advertising inventory?
What is an ad inventory shortage and why should it concern a publisher or ad network?
When and where do ad inventory shortfalls typically occur?
What can a publisher or ad network do to avoid or manage a shortage of ad inventory?

What is online ad inventory?

Stated in the most basic terms, online advertising inventory is the available supply of traffic or impressions that the publisher can sell to online advertisers interested in targeting the users that visit the publisher's site. However, a deeper understanding of what constitutes ad inventory involves a much more nuanced and complicated analysis. In its December 2004 white paper entitled Inventory Management: Best Practices for Online Publishers, DoubleClick posits that online advertising inventory is comprised of the following elements: "site structure, site visitation patterns, audience composition, and campaign description information." The paper goes on to analyze each of these elements in substantial detail, highlighting their potential complexity. For example, it states that site structure is "composed of: fixed pages containing consistent ad units, dynamic pages with variable content, and ad units based on user interaction and preferences, [and] "hidden" inventory, such as interstitial ads." Another example of the potential complexity is the element of "site visitation patterns," which – according to the paper – are determined by "the number of unique visitors (the audience size), frequency of repeat visits, duration of a visit, and the number of page views generated during a visit."

What is an ad inventory shortage and why should it concern a publisher or ad network?

Simply put, an ad inventory shortage occurs any time the demand from online advertisers for traffic or impressions exceeds the available supply. Such a shortage leaves advertisers frustrated that they cannot obtain the ad space they need for their online campaigns, and it prevents ad networks and publishers from fully monetizing their available ad inventory. In classical economics, the price of a good or service is supposed to reflect the point at which the demand curve for that good or service meets the supply curve for such good or service. However, accurately pricing online ad space over time is much easier in theory than in practice. Precisely predicting the future supply and demand of ad impressions is a dauntingly complicated task for most publishers and ad networks, particularly when the supply of impressions can be segmented so differently for so many different types of advertisers: there is a virtually infinite number of possible demographic, behavioral, and other targeted advertising combinations. For example, one advertiser might want a behavioral advertising campaign that focuses on mothers between the ages of 30 and 45 that have read at least three digital camera reviews, while another advertiser may be interested in targeting recent college graduates in California researching student loan refinancing options, etc. Moreover, the price for ad space often cannot be rapidly changed each time supply or demand is incorrectly estimated, and therefore the price that a publisher or ad network charges often does not effectively reflect market realities and results in a premature sell-out that inefficiently allocates the scarce ad inventory. Advertisers who were willing to spend more to appear on a particular page are simply turned away because there is no inventory left on that page, and the publisher or ad network loses that additional money that the rejected advertisers were willing to pay.

When and where do ad inventory shortfalls typically occur?

Ad inventory deficiencies occur at different times for different types of sites. In general, sites are more likely to experience inventory shortages on the major holidays than during the rest of the year, because these occasions have been commercialized into mass shopping frenzies (both online and offline). Certain special interest sites also predictably experience inventory shortfalls during industry-specific events that occur seasonally. For example, financial news sites can expect heavier advertising demand around tax season. Online sports publishers should expect an inventory crunch during major sporting events such as the Super Bowl, NBA Finals, and the World Series. Similarly, entertainment sites are likely to experience a supply shortfall around major award events such as the Grammy, Emmy, and Oscar awards. Dea Lawrence, Managing Director of Sales & Marketing for the Variety Online Group, a major publisher of Hollywood industry news, notes that the trade publication is "sold out during Academy [Awards] season, which starts at the end of October and runs through the middle of January." According to Ms. Lawrence, ad units are "priced at 30-40% higher" during Oscar season.

Page-specific shortages can also occur year-round for the most popular sites. For example, according to a Wall Street Journal article published on November 16, 2005, "The front pages of Yahoo Inc., Time Warner Inc.'s AOL and Microsoft Corp.'s MSN are sold out on big display ads for months in advance...Web sites offering car-buying tips are booked so far in advance – up to 18 months in some cases – that they are selling ads for next year in a process similar to the way network TV spots are sold."

Which categories of publishers are likely to experience an ad inventory shortage? The same Wall Street Journal article reports that "Demand for premium ads is strongest for Web sites that feature content about movies, autos, travel, consumer electronics and personal finance."

In general, there will always be greater demand for the most desirable ad inventory: context-driven ads that directly relate to the surrounding editorial content, and targeted ads that can effectively focus on certain demographic, lifestyle, or behavioral attributes of the end user viewing the ad.

What can a publisher or ad network do to avoid or manage a shortage of ad inventory?

Most major ad serving technologies offer some inventory prediction and/or management capabilities. For example, DART for Publishers claims to provide "a wealth of intelligence on inventory and campaigns so publishers can sell and support advertisers more effectively." 24/7 Real Media states that its Open AdStream® 6 helps publishers match "advertisers' segment-specific creative to the available inventory…by combining…ad serving, behavioral targeting and Web site analytics within a single user interface." Accipiter says that its AdManager enables publishers "to increase targeting capabilities, to speed ad delivery, and to monitor and control inventory projections in real-time, leading to higher CPMs and less unsold inventory." To the extent that such claims are accurate, mastering and fully exploiting the inventory tools that are already included in a publisher's ad serving technology is a good place for a publisher to start, before considering additional investments.

In the immediate, short-term, publishers may also want to focus just on those web pages where the supply scarcity is most acutely felt. Publishers should rely on their historical information and/or industry-wide data to develop a general sense for when and where their ad inventory shortages are most problematic. Once the supply-starved pages have been identified, they can then be redesigned and/or divided up into a greater number of sellable parts (for example, replacing a full banner ad position with two half banners). The greater the number of discrete ad spots a publisher has for sale on a given page, the more opportunities such publisher has to make last-minute adjustments to unexpectedly high demand by increasing the price of any unsold inventory remaining on that page. Of course, the solution of increasing ad spots has some inherent upper limits. Excessive ad clutter in the page layout or an advertising-to-content ratio that is unacceptably high to advertisers (or site visitors) can create problems that may be worse than the inventory shortage in question.

Publishers and ad networks with significant negotiating leverage may also be able to introduce some additional price flexibility into their contracts, such that advertisers who wish to reserve ad spots during periods that are known to suffer from low inventory may be subject to additional fees, depending on the actual demand at the peak time. For example, publishers with enough bargaining power can require advertisers to pay a non-refundable reservation fee that gives them the right of first (and/or last refusal) to buy a particular ad spot during a particular peak period, and the final price for such ad spot is determined by the actual demand that is present only weeks or even days before the ad spot is actually allocated to the highest-bidding advertiser.

A complementary option is to implement a real-time, auction-based pricing mechanism for online ad space, such as the one recently launched by Right Media (known as the Publisher Media Exchange or "PMX"). According to Right Media, the PMX "empowers publishers to consolidate inventory on their own auction-based platform and enable advertisers and ad networks to compete for every impression in real-time."

In an insightful September 2006 white paper entitled "Prediction And Provisioning: The New World Of Inventory Management," Benjamin Crain of Rapt Inc. wrote that "sellers need to consider what subset of the inventory they choose to predict rather than consider their entire set of inventory…Publishers have the opportunity to actively manage revenue performance based on the types of business they accept and how they choose to ‘spend' their impressions. Demand intelligence helps companies manage those trade-offs." For companies that are prepared to pay for a very in-depth understanding of their inventory, Rapt offers a proprietary, algorithmic approach to forecasting accurate near term estimates of supply. According to the Rapt web site, the company also offers pricing software that helps publishers to "uncover and understand the many complex supply, demand and price relationships that…predictably improve profit and market share."

Because price flexibility is the key to managing changes in demand, having alternative products and options to offer the next advertiser is critical to publishers and ad networks who want to contain an unexpected supply shortage. The ability – at the last minute – to convert one ad space into several ad spaces (without drastically altering the look of the page) can go a long way in more effectively minimizing the problem of an inventory shortfall. Ms. Lawrence of Variety Online said that she is constantly trying to "come up with inventory outside of the [typical] banner" as a way to manage unexpected supply scarcity.

Some ad formats are specifically designed to offer publishers and ad networks exactly this kind of flexibility. For example, the Tristitial features three banners that smoothly transition from one creative to the next, effectively tripling the number of ads that can be displayed in a particular ad position, without ever changing the overall layout or design of the page or site. Because the Tristitial can be created in both standard IAB and custom sizes, it can replace any ad space that could otherwise be sold to only a single advertiser. As far as the site's regular visitors are concerned, the amount of ad space relative to content has not changed. Nevertheless, the Tristitial enables the publisher to transform a single ad space that would otherwise have only one price, into three ad spots that can each have a different price.

Increasing the advertising-to-content ratio provides another way to mitigate an ad inventory shortage problem because it directly increases the amount of available inventory. However, this solution often requires a substantial site redesign that may consume significant time and/or money. Moreover, increasing the advertising-to-content ratio on any given page is a delicate and complex calculation that carries it with it the risk of alienating certain site users and/or advertisers. Esthetic and readability considerations aside, too much ad clutter can also harm the actual functionality of the web site by slowing down page loading and responsiveness. The ideal advertising-to-content ratio for any particular publisher is beyond the scope of this article, but there have been a variety of studies on the subject. A 2004 study by Burst Media suggested that too much ad clutter can hurt brands. A 1997 study by Louisa Ha and Barry R Litman of paper magazine advertising concluded that "advertising clutter can yield diminishing and negative returns" but it is unclear how much such a study – conducted almost a decade ago – can be applied to the current realities of online advertising.

Summary

To conclude, an efficient allocation of ad inventory by a publisher or ad network will ensure that scarce impressions are sold for as much as possible to the advertisers who most value them. Publishers concerned about managing their supply more effectively should ensure that they have mastered the inventory management tools offered by their existing ad serving technology. They should also explore ways to divide up their inventory into more sellable parts and/or augment their inventory by increasing their advertising-to-content ratio. Publishers that do not have the time and/or the money to redesign their site or investigate more sophisticated inventory tools should consider using ad formats like the Tristitial that can instantly and easily multiply the number of available ad spots on any given page. Publishers committed to a more involved and comprehensive strategy should explore technological solutions such as real-time auctions and/or advanced third party inventory prediction tools that can help identify ways to maximize the overall value of their site.

Gil Lahav is the Co-Founder and CEO of snap2eyes LLC.

Published: August 31, 2006





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