Aligning Incentives is the Key for Success in Adtech

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Last year, the wave of discussion about whether adtech or martech is superior rumbled from Madison Avenue to Silicon Valley. For most, martech was the clear winner, with the sector’s SaaS-based business model a “key factor” in its success and desirability.

Of course, it’s no surprise that martech, which employs a recurring revenue business model, would appear superior to adtech’s insertion order (IO), for example. With a SaaS model, once the initial deal is done, subscription fees are incurred with relative regularity. For instance, Adobe will sell a company a Photoshop license every month. And like those consumer loyalty programs where a company will charge you monthly, whether or not you use the product and no matter how often, the martech company always receives payment.

In our world, DSPs have a two-step sales approach, making a true SaaS model, as Wall Street understands it, exceptionally difficult to execute.

This is all contrary to the IO model, widely used in adtech and generally dictated by the volume of media that runs through a platform’s pipes. Here, each campaign has a start and end point, which means financial and human capital must be spent to win new campaigns with some level of frequency. Given the hardships and lack of consistency associated with IO, at least a few vendors have attempted to shift to a traditional SaaS-based model, but they’ve not been met with much success.

The reason?

In our world, DSPs have a two-step sales approach, making a true SaaS model, as Wall Street understands it, exceptionally difficult to execute. Take a DSP for instance. Step one looks a lot like our SaaS cousins over in martech: sell the DSP into the client to provide them a seat.

The process doesn’t end there though. There is a misconception among many that if you sell a DSP to an agency, you receive 100 percent of their programmatic campaigns.  This is not the case; each campaign comes with its own set of objectives and a need for specific media.  For instance, some campaigns may focus on mobile, and others on branding.  Depending on your client’s campaign objectives, it’s very likely they will use more than a single DSP as a result. This means that for each campaign, you still need to compete for the share of the budget with other DSPs. Therefore, step two is convincing the client that your platform is optimal for reaching their campaign objectives.

Although platforms are carefully selected based on their expected contribution on a client’s campaign objectives, the remuneration model for the usage of DSPs is not aligned with the campaign objectives.

With most current platform business models, there is a fixed transparent fee for the platform and as such, no incentive for the platform provider to invest into performance. With the fixed fee, the client takes on the full risk of their marketing investment and the alignment between the client’s interests and the platform provider’s is missing.  You could even argue that platform providers are currently disincentivized to drive maximum performance as the better the advertising dollars work for a client, the less dollars they would spend on a DSP to achieve their goals.

How do you solve for this?

The solution is to have a transparent platform fee that scales with the performance you deliver on behalf of your client. The platform fee is based on a percentage of media and an extra fee for hitting campaign performance thresholds.

In adtech, the companies that will win will do so by creating an offering that facilitates alignment on both incentive and compensation, where the agency, brand and tech vendor earn a share of the value that they help generate. This is adtech’s business model of the future, and the companies that adopt it are the ones that will set themselves up for success in the ever-changing adtech landscape.

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