Laws of supply and demand in display advertising

In advertising, performance is the most sacred metric. Advertising performance is linked to overall business performance and green days mean profits and red days mean loss. Traditional forms of advertising lacked tracking technologies and as a result, marketing campaigns were analyzed on a lifetime basis, meaning from the start of the campaign to finish. Today, analyzation tools and advanced reporting makes it possible to evaluate your campaigns by the minute and get access to real-time data. Advertisers stay hooked 24/7 and new discussions are born that question why performance varies so greatly from different periods. The more information advertisers have access to, the more questions they have unanswered. One of the biggest questions is why does performance change so greatly from one day to another? How can one day be profitable while another can result in a loss of money? 

In short, the answer is supply and demand. If you took an economics class in college, I am certain you have heard of the metaphor of the invisible hand of the market. The invisible hand is defined as. “the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.” When you’re advertising online on any major advertising platform, the laws of supply and demand will impact your performance and likelihood to succeed in your market. To understand the concept in-depth, let’s break it down into elements. 

SUPPLY AND DEMAND IN ADVERTISING PRICES 

Advertising giants like Google, Facebook, Yahoo, Bing, and Snapchat use a very simple way to determine the cost of displaying a single ad. Instead of trying to guess what an advertiser might be willing to pay for it or what would be considered fair, they simply let advertisers bid for it. On each of these platforms, there are billions of automatized auctions that happen every second.

Other factors impact your likelihood to win an ad auction like ad quality and relevance to the user, but the price you are willing to pay is the most important factor. To simplify it, most platforms use automated smart bidding which saves advertisers the hassle of determining how much they should bid to get the results they want. The way it works is simple. Set the target goal that you have, like target cost per purchase, target cost per click, or target ROAS on every dollar spent, and the system will set the bid automatically in efforts to reach the goal you have. If it doesn’t predict you have a chance to achieve your goal in the relevant auctions, it won’t deliver your ads until it finds the right opportunity. 

The more advertisers compete for similar audiences, the more it will cost to reach that audience. Yes, we can’t target the exact individual we want to show ads to, but we can target audience groups. Audience groups are similar people that might fit our potential audience. That’s why targeting people in New York City is more expensive than targeting people in a city in Africa. More advertisers want to target people in New York than in any other major city in the world. To make it more complex, it’s important to understand that it’s not just about the city. It’s about different demographics as well. People who are 18-45 years of age are more expensive to target than people who are 45+. To spice it up, even more, people in the same age groups and locations can sometimes cost different amounts to target. 

The advertising platform that you use tracks as much information as possible about users to distinguish high vs low value in terms of online shopping, online activities, and other online behavior. Then, it groups them into relevant segments. That means that a user in New York who is female, 25 years old, and shops online a lot can be more expensive to target than another female who lives in the same city and is the same age but shops online less. 

If more advertisers compete for the same ad group at a given time, naturally, the price will go up. The same can be said about the audiences themselves. If fewer people are logging into the platform at a given moment, it means that fewer advertising spaces will be available and demand will also decrease. This demonstrates that even without increasing the number of advertisers, prices of ads can still go up since inventory (ad placements- supply) becomes more limited.

SUPPLY AND DEMAND IN THE SAME MARKETS. 

Just as the number of advertisers who compete for similar audiences can have an impact on your ad prices, the type of advertisers who compete for the same audience will also have an impact on your ad performance. This rule applies more to display advertising than to direct search ads. The more ads a user sees from the same type of market, the less effective they will be. Think of the reasons big corporate companies spend hundreds of thousand dollars per month to put huge banners on busy streets in big cities. They want exclusivity. They don’t want to show other products next to theirs because they understand that it will lower the value of their advertising. 

The same rule applies here to ads. Let’s say, for example, you own an e-commerce sunglasses store. Think of a single user who sees four sunglasses ads per day on his newsfeed. What would happen if instead of seeing four ads he would see ten ads? Statistically, your chances of converting him into a customer will decrease and his interest in purchasing a pair of sunglasses might decrease as well. Bombing users with similar ads for the same product will have a negative effect. 

In direct ads, increased competition from the same market is tied directly to increased ad prices, as more advertisers will bid for the same keywords and will drive the prices up. In-display advertising, it’s different. Because we are targeting interests and not keywords, different competitors from different markets target the same audiences, as one user has many different interests. Having increased direct competition won’t increase your ad prices at the same rate that it will decrease the user’s likelihood to purchase your product because your market is becoming saturated. 

DEMAND FOR YOUR PRODUCT 

The first two points above discussed the impact that advertisers have on supply, but what happens when the amount of advertisers remains consistent, but fewer people are buying? Or maybe fewer relevant people are clicking on ads? Advertisers tend to forget that they place ads in front of people, not machines. You can’t expect the results to always be the same, and in the same way, the stock market is impossible to predict, so is user behavior. If fewer people are purchasing on a given day, you should expect to pay a higher price for ads. 

On most platforms, you are billed based on a pay for 1000 impressions model which means that regardless of your results, you will be billed the same. This means that when fewer people are buying or clicking on your ads, your cost to bring a visitor to your website or to convert him into a customer increases. The three main metrics that you can evaluate if you have a decrease in demand are CPA (cost per purchase, cost per lead, cost per app install), CTR (the number of visitors who click through your ads to your website), and your result rate (the cost per result divided by the number of impressions your ads had). If any of those three metrics decrease, it can imply that demand is lower. 

In e-commerce, one of the biggest factors that can impact demand is your best-selling products. It’s not a secret that in most stores, a small percentage of best-selling products account for the majority of total sales. A small decline in one of the best-seller’s daily sales or a best-seller that goes out of stock can dramatically impact the store’s performance. If you had a product that accounted for 20% of your daily sales that suddenly stopped selling or went out of stock, you can imagine how much your campaigns would be impacted. 

I feel that there are some drawbacks to real-time reporting. These include possible mismanagement of ads by over-optimizing, or making irrational decisions based on small data sizes or small time frames that can lead to a negative impact on your ad’s performance. When looking back to evaluate past performance, a single day’s performance won’t matter that much, and you should always look at the lifetime performance of the campaign to conclude whether or not it was successful. Having access to real-time data is extremely valuable, you just need to make sure that you use it effectively. 

IN SUMMARY:

Display advertising has changed massively during the last two decades. Technological innovations introduced a new way to facilitate the cost of advertising as well as introduced ways to track marketing performance in real-time. Supply and demand play the biggest role in the performance of your campaigns. Whether it’s changing in price, the number of competitors, or change in your relevant audience, supply and demand are what positively and negatively impact your marketing performance.