This article is for everyone who is looking to get into, or has just broken into the world of online advertising. It’s a high level review of how the online ad system works. A resource like this article would be awesome if you want to get up to speed quickly. A lot of this information is a review from a General Assembly Class that I had taken with Paul Canetti, who is the CEO of MAZ.
For starters, here are the main players in the online ad world:
Now, let’s get started with the basics.
Marketers have products, which they want to sell. For example, Nike wants to sell basketball sneakers. So in order to sell their product, they advertise. Essentially, marketers are advertisers.
Where do marketers advertise?
Good question, I mean marketers have to have a place to advertisements somewhere, right? That’s where publishers come in. Publishers create content so that users can consume their content. An example of a publisher is ESPN.com. ESPN.com provides sports news to their users (the consumer or you) and Nike advertises their products on ESPN.com.
I’m writing another article discussing how publishers are evolving in the online space. For now, just understand that publishers have ad space, or inventory, where marketers can place their advertisements.
This inventory is spread out over networks. Think of networks as the brokers between the publishers and the marketers. Google and Yahoo are great examples of networks. They link the supply of inventory provided by publishers with the demand to advertise by marketers.
So just a quick review, publishers are creating content, which provides inventory. This inventory is provided over networks, which marketers want to advertise on.
Okay, all good. But wait, how does everyone make money in this process?
Money, it makes the world go round.
There are three pricing systems in online advertising:
CPM – cost per mille, or cost per thousand impressions. So, for every thousand impressions (a view of an ad) that a user sees, the publisher gets paid.
Let’s say that ESPN.com shows ads for Nike basketball sneakers on their website. If Nike is paying a $1.00 CPM, and 1 million users view their ad on ESPN.com for basketball sneakers, then Nike would pay ESPN $1,000 for that ad campaign.
CPC – cost per click. No money is made when someone views an ad but the publisher makes money when an ad is clicked. That is every ad that is clicked. CPC is great because it shows that the user’s interest is peaked enough that they actually engage with the ad, which eventually could lead to a purchase.
Let’s use the example with Nike and ESPN above. If Nike is paying a CPC of $1.00 for every 1,000 clicks on Nike basketball sneaker ads on ESPN.com, Nike pays ESPN.com $1,000.
CPA – cost per action. Money is only exchanged in this circumstance when a user actually takes an action. That could be providing an email, signing up for a newsletter, or even purchasing a product.
Using the example with Nike and ESPN.com, let’s say that Nike is paying a $10.00 CPA. Nike has defined that the action that will be paid out is a purchase. So if someone visits ESPN.com and sees Nike’s basketball sneaker ad, then purchases a pair of Nike basketball sneakers, ESPN.com gets paid $10 for every purchase.
So that’s how money is made in the online ad space. But, how does the marketer deal with all the publishers and ad networks that there are?
That’s where agencies come in. Agencies are the representatives of marketers and typically make buying decisions on behalf of a marketer. Have you seen Mad Men? Think Don Draper. An example of an agency is Ogilvy & Mather.
So Nike will provide Ogilvy & Mather with their budget, which could be $100 million, hypothetically. Ogilvy & Mather will then decide how to spread that money out across different mediums. For the scope of this article, let’s stick to the online space. That budget from Nike, will be distributed across ad networks, exchanges, and publishers under the discretion of Ogilvy & Mather.
Agencies will leverage ad technology and ad networks in order to ensure that their money is being spent as efficiently as possibly. In fact, publishers and advertisers want to spend their money efficiently as well, so they leverage data in order to do so.
There are two types of data:
- Supply Side (Publisher)
- Demand Side (Advertiser)
So the publisher leverages supply side data by understanding what type of content their users are responding or engaging with. Imagine ESPN.com publishes an article about what basketball sneaker LeBron James wore at Madison Square Garden. They can do this through comments and views (for example). Now if a lot of users are reading this type of article, where do you think ESPN wants Nike’s ads to show up?
On the demand side, advertisers want to keep data on YOU. They do this by utilizing cookies. Cookies tracks users across the web. So, let’s say that you went to nike.com because you need a new pair of sneakers. Now, after you visited nike.com, you decide to go to ESPN.com to check out an article about what sneakers LeBron James wore at Madison Square Garden. Guess where Nike wants those basketball sneaker ads to show up? This is also known as “re-targeting”.
In summary, publishers keep data so that they can leverage their inventory better and advertisers keep data so that they can place ads better. Make sense?
What happens when another marketer wants to serve up an ad in the same spot as another marketer?
Let’s say that Nike and Adidas are advertising their basketball sneakers and want their ads to appear in the same spot on ESPN.com.
Exchanges are basically the stock market for ad inventory. They allow advertisers to place bids, buy, and sell on a real time basis depending on the supply and demand of ad inventory. Finally, depending on the supply and demand of ad inventory, Ad servers serve up the ads to the user based upon the quality of an ad, the price, network, etc.
So, let’s go through an example. We’ll say that Nike and Adidas are providing an ad for basketball sneakers. Both marketers are bidding on a CPC basis, Nike is willing to pay a $1.00 CPC and Adidas is willing to pay a $1.25 CPC. We’ll say that Nike is providing an ad for black basketball sneakers and Adidas is just providing an ad for basketball sneakers.
When a user goes to ESPN.com, an ad will be served up to them. The exchange will take into account what the marketer’s daily budget is, what they are willing to pay (CPC in this example), and even how specific the ad is, which is also known as ad quality. The data from the supply side and demand side will also determine how the marketer will serve its ads. All this happens in milliseconds.
There you have it. That is how the online advertising world works, on a very high level. And I stress, at a very high level. From marketer, through agencies, networks, and exchanges to publishers, and over to you. If you have any questions please note in the comments below.
Hope that this was a useful resource!