IX Perspectives Product

Reflecting on The Economics of Programmatic

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The journey of programmatic advertising has been fascinating, and Index Exchange (IX) has enjoyed a front seat for each major wave of innovation along the way. 

The first wave of innovation spanned 10+ years and focused on standards via OpenRTB to create scale and vendor choice, bringing relationships into programmatic via Deal IDs and Private Marketplace, and creating equal exchange access to inventory via Header Bidding so the waterfall could be rightfully put to bed (at least on the web).

The next wave is about making programmatic work better. IX advocated for and switched to a first-price auction to bring simplicity and transparency to all marketplaces; we’re working to unlock people-based advertising for publishers so they can capture the billions ($) in spend going to walled gardens, and we’re partnering with publishers to disclose fees so buyers can see the supply paths that maximise value for publishers.

But seeing the supply path alone isn’t enough… There’s one more concept in this innovation wave swirling around that’s yet to surface. It’s the economic principle that as the volume purchased increases, the lower the exchange’s transaction fee can become.

IX today has one single fee that is assessed on each transaction conducted on our exchange. That single fee is typically negotiated directly with our publishing customers (based on volume), and it is often static, like most exchanges today, regardless of the transaction. 

Going forward, we want to start to explore options that give buyers a choice in bringing their own economies of scale to the table in a way that assists publishers in driving up revenue and boosting working media dollars. We view this as an opportunity for innovation, and that it’s time for the industry to catch up.

To accomplish this, IX will be introducing a new program called Exchange Fee Reduction (XFR), which can drive down the fee IX receives from publishers on each transaction, and pass those savings straight to the publisher.

How Publisher Transactions Work Today Without XFR

Today, when a publisher signs up to access the IX marketplace, we negotiate a rate card that covers our fee for transactions.

IX calculates the outcomes of all auctions and transactions based on this rate, and at the end of any given billing period (typically a month), we pay the publisher their cleared ad spend on the exchange, less that fee. 

All of our auctions (via the header, s2s or otherwise) return the best winning bid back to the publisher in the form of a net bid (versus gross), meaning the IX fee has been taken out of the bid. This means publishers can compare the true ad spend they’ll receive at the end of the month from IX to bids from other exchanges with different fee structures. Ideally, the lower fee structure should win, so the publisher always maximises revenue.

In reporting, we also share both the gross bid as we receive it from DSPs and the net bid, with all parties in the transaction to ensure our single fee is always transparent.

How Exchange Fee Reduction (XFR) Works

A buyer on the exchange (often a major agency) may now establish its own XFR based on their buying power. Exchange Fee Reductions will typically be tiered and volume-based, meaning the more the buyer spends on the exchange, the lower the IX fee to transact will become.

At the time of the auction, IX will always have a rate card for the publisher and may now have an XFR for the buyer. As we assess the participants in any given transaction, we will identify if an XFR should apply in real-time, and if the XFR can lower a publisher’s rate and provide savings – the lower rate is used automatically. Some publishers already have very favourable IX rates, and, in this scenario, additional savings might be small until different XFR tiers are unlocked by the buyer. 

Graph explaining how publisher revenue increased with the use of Exchange Fee Reduction

We will continue to send the publisher the net bid, which includes extra revenue from XFRs that helped lower their IX rate. As a result, the publisher receives more revenue from IX at the end of the month. 

There’s nothing for publishers to do to participate – if a buyer spends more and unlocks an XFR with IX on transactions, publishers will automatically receive benefits, and will see them going forward.

Continuing Fee Transparency via Reporting

We feel each participant on the exchange is owed a receipt for their transaction that clearly discloses our fee. Our Client Audit Log (CAL) — which is widely in use today (hundreds of clients already reconcile their transactions in real-time on IX with this API) — will provide clarity on the financial dynamics and XFR savings for every transaction participant. The third-party reporting solutions commonly used by publishers that are powered by the CAL, like those built by Staq, Switchboard, Ad-Juster and Adomik can also access this information.

All parties in each completed transaction have granular access to the breakdown of the gross bid, IX rate, net bid, and the final cost. Everything is processed line-by-line, transaction-by-transaction, and always 100% transparent. 

And our impression audit logs are free – baked into our single exchange fee.

Motivations and Looking Ahead

To recap, why is IX exploring XFR? And how will this plan pass savings along to publishers? 

As a company, our mission is to support journalism and premium content, allowing it to reach the widest possible audiences. We plan to continue doing everything we can to accelerate this. By ensuring more of a marketer’s dollar goes to the publisher, we’re fundamentally helping to further that mission. 

We also believe in the value and support that many agencies offer to their clients. As marketers increasingly expect to drive outcomes and ensure more of their budgets go toward working media instead of fees, we will make sure budgets continue to grow in programmatic (aligning with our mission to help publishers thrive).

Our partners are looking to IX to innovate and invest in the future. They want us to: continue to lead on alternatives to cookie-based advertising, expand into all channels and formats; and deliver an open and scaled alternative to the walled gardens. They also want us to offer price leadership in a way that will benefit all parties. And Exchange Fee Reduction (XFR) is a step in that direction.

We hope this clarifies our laser-focused commitment to innovating for publishers and the ecosystem at large. For additional updates, read our latest blog on XFR.

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