The Funny Math That Underpins Programmatic Digital Advertising

Let me start with a simple question — when was the last time you deliberately clicked a banner ad? And if you remember that occasion, what brand or product was it for? Take your time, I have all day.

I’m not even going to talk about the number of ads you thought were relevant, versus the ones that were not relevant despite the millions spent on ad targeting services. But I will talk about the funny math or fuzzy math that I see everywhere when it comes to programmatic digital ads. Perhaps it’s because folks can’t add; or perhaps it’s because they want desperately to believe it works; or perhaps, simply, they never thought of it this way. Whatever the case, it is worth closer consideration. Let’s do some math, shall we?

Ad Arbitrage Doesn’t Work Without Fraud

Let’s start with this reddit/adops thread, where an innocent not-yet-corrupted soul asked simply, “So I would have an expense of $0.03 for an impression and an income of $0.0005 for that impression on the site. It seems impossible to generate income that way, but I know people do it. Any advice would be highly appreciated.” What he is pointing out is a perfect example of the funny math of traffic arbitrage, if real-world rules applied. Say you were to run ads to drive more traffic to your site, and you paid $3 CPMs (cost per thousand). That means for $3, you got 1,000 ad impressions. Next, what click through rate should we assume? Let’s say 1% for ease of calculation. That means for the 1,000 ad impressions, you got 10 clicks (1% of 1,000). You paid $3 to get 10 clicks to your site. That means you need to pay $300 to get 1,000 clicks to your site. A thousand clicks to your site from the ads you run means you have 1,000 pageviews, enough to sell one CPM of ads yourself so someone that wants to advertise on your site.

How much do you think your site can charge for those ads? Let’s say $5 CPMs. That means if you ran one ad on the page, the 1,000 pageviews you just got will get you $5 of ad revenue. You paid $300 to get 1,000 pageviews, to earn $5 in ad revenue. (Or in the redditor’s version, he paid $0.03 per impression, and earned $0.0005 per impression). The math doesn’t work. You’ll be perpetually LOSING money.

What if you could magically pay 0.3 cents per CLICK. That’s right, three-tenths of a cent per click (not impression). That’s a click to your site for 3/10th of a cent. So 1,000 clicks costs $3, not $300. Then if you had 1 ad on the page and you charged $5 CPMs, you’d magically make $2 of profit ($5 revenue – $3 cost = $2 profit). But how is a 3/10th of a cent click possible? Can you force a whole bunch of humans to click on ads? To get a 3/10th of a cent click, you would need a 100% click through rate on 1,000 ads at $3. You paid $3 to get 1,000 ad impressions, and you got 1,000 clicks (100% CTR). That’s how you get a 3/10th of a cent click.

No matter how many times you turn this around in your head, it shows you that ad arbitrage cannot happen WITHOUT fraud. You can’t force humans to click on a lot of ads. Humans don’t click on a lot of ads. Bot can easily be programmed to click on all ads — 100% click through rate (CTR). Or fraudsters can simply send you the click traffic to your site, without actually running any ads, even if you uploaded your ad creative to their platforms. Think carefully about the platforms that tell you “don’t worry about where we run your ads; you’re only paying for the click anyway. So we won’t show you placement reports of where your ads ran, or if your ads ran at all. As long as we deliver you the clicks you bought, don’t ask any questions.” Funny math? Fuzzy logic? Or outright fraud?

Ad arbitrage doesn’t work without fraud. But yet, everyone’s doing it. And it is highly profitable for them. Note that instead of 1 ad on the page, those eager to earn more revenue can simply stick 100 ads on the page, or 1,000, whatevs. They’ve also renamed it “traffic arbitrage” because if you can buy traffic at $3 and sell ads at $5, you pocket $2. Traffic arbitrage is enabled by “guaranteed traffic” which sounds great, until you realize it’s impossible in real life. Humans don’t click ads that much, let alone at a 100% rate. The following examples show just how profitable “traffic arbitrage” is — you put in $1 and you get $41 out (a 41X return). Why wouldn’t fraudsters put the next dollar in? They’re perpetually MAKING money.

How does this tie back to you, the marketer?…

Read The Full Article