The basic logic of Internet advertising

No ToC product can survive without Internet advertising . Because the Internet has been dominated by ToC for the past few decades, advertising has played an irreplaceable role in it, and the field has also become increasingly mature.

The field of Internet advertising is complex and involves many factors.

1. From the perspective of participants, there are the supply side, mainly the media, supplemented by media agencies; the demand side, mainly advertisers, agencies representing advertisers’ interests, and other traffic buyers; and a group of passive Internet users like me;
2. From the perspective of settlement methods, there are CPM, CPC, CPT, CPA, CPS, oCPM, etc. In fact, the settlement method also implies the division of labor and cooperation in the market, that is, who is responsible for predicting the click-through rate of advertisements and evaluating the value of advertisements;
3. From the perspective of transaction form, it includes contract transactions and bidding transactions;
4. From the perspective of monetization methods, it includes traffic monetization, data monetization and influence monetization. Traffic monetization means making profits through selling advertisements, and its core lies in the traffic base, that is, the scale of traffic; data monetization means improving the efficiency of traffic monetization (including conversion rate) based on the use of data; influence monetization means that my product is high-end and has more high-net-worth users, so the price of traffic sales will naturally be higher.
5. From the advertising display logic (i.e. the relationship between advertising and content), we have experienced the complete independence of advertising and content, with a weak connection, and then to the current exploration of native advertising. Native advertising means that the advertisement and content (non-advertising part) are highly consistent, and users will not obviously perceive that it is an advertisement. A typical example is the product advertisements in the Taobao information flow. It is almost difficult for users to identify which ones are product advertisements. Its core logic is to provide advertisements related to the user's current behavior without interrupting the user's task, so as to improve the conversion rate.
6. From the perspective of technical requirements, it also includes advertising scheduling system, online traffic distribution system, online traffic prediction, click-through rate prediction, click value estimation, etc.
7. From the perspective of advertising strategy, it includes pricing strategy, market reserve price strategy, price squeeze strategy, advertising search strategy, advertising ranking strategy, bidding strategy, etc.
8. From the perspective of advertising effect, it can be divided into brand advertising and performance advertising.

With so many factors involved, it is almost impossible to have a comprehensive understanding of the Internet advertising sector without systematic sorting. But after careful analysis, we found that the evolution of Internet advertising is based on the evolution of transaction forms and data monetization, with the optimization of advertising display logic as a secondary line.

This article mainly deduce the evolution of transaction forms and data monetization capabilities of Internet advertising, as well as the impact on other factors, and ultimately promotes the vigorous development of the Internet advertising market.

1. Contract advertising, as the name suggests, is to sell traffic in a package in the form of a contract to realize the initial traffic monetization

In the early days of Internet advertising, the cooperation model was actually copied from offline advertising, that is, the demand side purchased traffic from advertisers in batches according to the contract. This stage had the following characteristics:

1. Bulk purchases are mainly based on ad space. Because the advertising effects of different ad spaces on different media vary greatly, and because some ad spaces are not popular, a large amount of traffic is difficult to sell and monetize through contracts.
2. Because it is difficult to guarantee the effectiveness of advertising and the threshold is high, it is mainly brand advertising involving large advertisers
3. The advertising display logic is that the advertisement and content are completely independent
4. As mentioned above, different media have different advertising effects, so they rely more on media influence. Therefore, some media will also rely on their own influence to enable traffic monetization, that is, influence monetization.
5. During the contract advertising period, based on data monetization capabilities, it can be divided into two stages: fixed advertising space contract and fixed position audience targeting contract. Compared with the former, the latter has begun to realize data

Fixed-position contract advertising, which is to buy out the display and exposure of a specific advertising position in a certain period of time, is also called CPT advertising.

The main features of this stage are:

1. The offline advertising model is completely copied to the online version, such as the previous newspaper advertising, so it also inherits the window effect of offline advertising, thus having exclusivity, that is, there will not be competitors' advertisements in the same advertising space or even in the same media. Just like you won’t see Gome and Suning’s advertisements in the same newspaper
2. Because it is sold in packages, the unit price of each contract is high, which means the participation threshold is high. At the same time, the quality of different traffic during this period is uneven.

The characteristics contain pain points, and the pain points will become the driving force for things to develop to the next stage.

What are the pain points of the demand side (mainly advertisers) at this stage?

1. Some users of the traffic purchased by the demand side are not the target population, resulting in excessive advertising costs. A typical example is women's luxury bags. The conversion rate of women must be much higher than that of men. If the unit price of traffic is the same, why not spend more money on purchasing female traffic? However, it is not possible to differentiate traffic at this stage.
2. What are the pain points of suppliers (mainly media platforms) at this stage?
3. Because the unit price is too high, the participation threshold is too high, mainly large advertisers participate
4. Unable to sell the appropriate traffic to the corresponding demand side, resulting in high price and low selling

The main technical issue at this stage is the scheduling system, which is to schedule the advertising display according to the time period purchased by the advertiser.

As mentioned earlier, the current pain points are the driving force for subsequent changes. Based on the above pain points and because the development of targeting technology makes data monetization possible, fixed-location audience targeted contract advertising came into being.

Fixed-position audience-targeted contract advertising is also called display contract advertising, which means purchasing exposures for specific groups of people in specific advertising positions. This allows the demand side to purchase traffic that meets their own requirements based on the target audience to reduce advertising waste. The supply side can also split and sell the traffic, that is, sell the traffic to more suitable demand sides, thereby obtaining more revenue.

This stage has the following characteristics:

1. The transaction is still conducted in the form of a contract, but because there is no limit on the specific time period, there are clear requirements for the total amount of exposure, so the supplier is required to have an accurate prediction of the different traffic of each advertising space to guide the sale of traffic. Because the traffic is not sold out, it will cause waste, and compensation is required if the traffic is not sold out.
2. Compared with fixed-location contract advertising, data is currently being used to improve monetization capabilities
3. The data realization in this stage is mainly reflected in the classification of people based on directional technology. At the same time, the data also provides raw materials for traffic prediction.
4. From the perspective of settlement method, it is mainly based on the amount of exposure, that is, CPM
5. Judging from the participating advertisers, more advertisers from different niche fields have joined in. A typical example is local services, which are only for consumers in a specific area. However, due to the inability to conduct regional targeting of media platform users in the early stage, they can only be delivered without geographical restrictions, resulting in a large amount of traffic waste. Small and medium-sized advertisers simply cannot afford the corresponding advertising waste costs.

As mentioned earlier, the characteristics contain pain points, and the pain points will become the driving force for things to develop to the next stage.

What are the pain points of the demand side (mainly advertisers) at this stage?

The division of labor in collaboration is unreasonable because the single billing model (CPM) means that the risk of advertising effectiveness is borne by the demand side. That is, the demand side needs to predict the probability of users clicking on ads and the subsequent conversions after clicking. However, what the demand side can optimize is actually the subsequent conversions after clicking. Regarding whether the user clicks, the demand side only has the ad position information and the user's basic targeting information.

What are the pain points of suppliers (mainly media platforms) at this stage?

Subject to quantity constraints. Because it is difficult to accurately estimate the traffic of fine-grained label combinations, and overly fine labels lead to lower sales rates. At the same time, when a flow satisfies multiple contracts at the same time, only allocating it online may waste traffic that could have been sold at a more expensive price.

The main demands for technology at this stage are: online traffic prediction, online traffic allocation (traffic can satisfy multiple advertisers at the same time and traffic is allocated under the constraints of the contract volume), and audience targeting technology.

Even in the later stages of contract advertising, because it is still entirely up to the demand side to estimate the advertising effect on their own, and the supply side is difficult to participate due to quantity constraints, the demand side of contract advertising is still mainly brand advertising, which excludes a large number of long-tail users, which greatly restricts the development of the Internet advertising market. Therefore, to further unleash the potential of the Internet advertising market, it is necessary to meet the demands of these long-tail users for advertising effectiveness, that is, suppliers must bear certain responsibilities for advertising effectiveness, but in order to give suppliers sufficient motivation to participate, they must also be liberated from quantity constraints. As mentioned above, the current pain points are the driving force for subsequent changes, and thus, bidding advertising came into being!

2. Bidding advertising, that is, selling traffic in a model where the highest bidder wins

Internet advertising has developed a bidding transaction form, which has a bit of the flavor of the transition from a planned economy to a market economy. There are no more "indicators" of the planned economy, but there are more market rules to be established, including pricing strategies, bidding strategies, etc.

This stage has the following characteristics:

1. The introduction of a pay-per-performance settlement model (such as CPC, oCPM, etc.) not only dilutes the differences between media and advertising space, but also makes it possible for media platforms to monetize a large number of remaining advertisements that cannot be sold in contracted advertisements.
2. The emergence of performance advertising has activated a large number of long-tail potential advertisers, thus bringing a new wave of growth to Internet advertising.
3. Because the settlement is based on actual consumption, the demand side usually recharges first, so the cash flow is better
4. The bidding objects are more diverse, and can be either people or places. People refers to the specific group of people bidding; scene refers to the scene & situation where the user is, including context or search keywords
5. We mainly adopt the model of "the highest bidder wins" and fully respect the market. But at the same time, suppliers will also consider user experience and advertising effectiveness
6. From the perspective of demand, the demand for maintaining volume still exists, but it has been transferred to advertisers and media purchasing platforms.
7. As suppliers begin to participate in advertising value assessment (user experience needs to be considered), the display format of advertising is gradually moving towards native

Like contract advertising, bidding advertising is divided into general bidding advertising and real-time bidding advertising based on the different abilities to monetize data. The former, like contract advertising, mainly utilizes the data of the supplier, while the latter is more likely to utilize the data of the demand side for monetization. A typical example is visit redirection, where advertisers provide users who have visited their platform and deliver advertisements to these users on the media platform.

General bidding advertising is actually the demand side informing the supplier in advance of the bidding requirements.

When corresponding traffic appears, the supplier will allocate the traffic to the demand side with the highest advertising value after estimating the advertising value (based on click-through rate and ad bid). For example, both demand parties A and B need male users who are 15-25 years old and live in Beijing. When a user who meets this condition appears, the supplier will obtain the advertising value based on the advertiser's bid and the estimated ad click-through rate, and allocate the traffic to the demand party with higher advertising value. In this process, the supplier's allocation is based on maximizing the advertising value without having to consider the total exposure guarantee for different advertisers. This removes the constraints of incoming traffic on the supplier in the process of traffic allocation.

The main features of this stage are:

1. The value of data monetization has been enhanced, and the targeting of the crowd has developed in a more refined direction;
2. At the same time, we also began to use data to estimate the probability of ad clicks.

The supply side's motivation to enter this stage:

1. Freed from the constraints of quantity, more traffic that was not effectively sold before can be monetized
2. The billing model has been adjusted. Demand is no longer limited to specific media and ad spaces, allowing a large number of previously unsought ad spaces to participate in traffic monetization.

The motivation for the demand side to enter this stage:

1. You can purchase more accurate traffic
2. The advertising effect can be measured intuitively, making it possible for a large number of small and medium advertisers to participate in the advertising trading market.

Pain points of demand side at this stage:

1. You can only bid for pre-defined groups of people, and it is difficult to obtain large-scale and refined traffic charges, that is, it is limited by the media platform's identification of traffic.
2. Unable to fully utilize the data accumulated by itself to serve advertising bidding

What are the pain points for suppliers at this stage?

1. There is still some remaining traffic that has not been monetized. This is mainly because in general bidding advertising, it is mainly based on what traffic the demand side wants, and then bidding on the corresponding traffic, rather than saying I have some traffic and you want to bid on it. Only when the demand side bids based on specific traffic can more traffic be bid.

As mentioned earlier, the current pain points are the driving force for subsequent changes. Based on the above pain points and because the demand side has accumulated a large amount of data, real-time bidding advertising came into being. The essence is to bid separately for each piece of traffic.

The demand side decides whether to participate in the bidding and bid based on the user ID sent back by the supplier, and then uses its own data to determine whether to make a decision.

Its main features are as follows:

1. The introduction of demand-side data (also known as first-party data, which uses its own data to customize labels for users) guides advertising, thereby greatly improving advertising effectiveness.
2. Demanders can freely choose traffic and bids based on their own data, which improves the ability to control individual traffic. In the process of refined operations, the finer the granularity that can be controlled, the more likely it is to achieve more refined operations, thereby improving efficiency. For example, traditional convenience store chains can only understand the overall situation of the store, while 711 can understand the sales of each single product in the store, so as to replenish stocks or adjust product display strategies in a targeted manner (for example, if the sales of a certain single product have been poor, it may be that users do not need the product, so the product needs to be removed from the shelf to free up the booth and inventory for other products).
3. Because the essence of real-time bidding is to strengthen the use of demand-side data, there is a major premise, that is, whether the demand side served by the supply side has its own data accumulation. Because general small and medium-sized advertisers do not actually have their own data reserves, whether to develop the demand side's data capabilities towards real-time bidding is an important consideration. A large media platform encountered a similar problem when promoting real-time bidding advertising transactions in the medical field. It was struggling to promote real-time bidding and later found that most of the medical advertisers it served did not have their own data reserves for advertising decision-making.

Requirements for the demand side at this stage:

It is necessary to use its own data to improve user information and combine it with the information about the market returned by the supplier to estimate the click-through rate of advertisements. At the same time, based on this and combined with the evaluation of the click value, bids can be made. Therefore, the demand side is required to have extremely high data monetization capabilities.

After the emergence of real-time bidding, advertising transactions increasingly rely on online communication between machines, rather than prior agreements or manual operations, so they are also called programmatic transactions. Programmatic trading also includes optimization, private market and programmatic direct investment.

In bidding advertising, in addition to basic functions, there are also a large number of strategic issues, such as pricing strategy, bidding strategy, bidding mechanism, and market reserve price; at the same time, it also benefits from the development of artificial intelligence technology, which gives data a larger monetization space, that is, it is not limited to crowd targeting, but can also play a role in advertising click prediction, advertising value evaluation and other aspects.

3. Comparison between bidding advertising and competitive bidding advertising

From the supplier's perspective: in contract advertising, the supplier is only responsible for the quantity of advertising and is not responsible for confrontation; in bidding advertising, the supplier is mainly responsible for bidding and charging rules, and also includes some responsibility for confrontation.

From the demand side: contract advertising lacks transparency, but because there is a guarantee of quantity, it is valuable for brand advertising; in bidding advertising, since you can pay based on the results, you can go from ensuring quantity to ensuring costs.

Although Internet advertising is complex, its main development line is the transaction form (contract or bidding) and the improvement of data monetization capabilities. There are two dimensions to data monetization capabilities: the first is the data source, which initially only used supply-side data and later began to use demand-side data; the second is the way data is used, which was initially mainly used for crowd targeting and field classification (such as context and search terms), and then began to be combined with artificial intelligence technology to further explore the value of big data.

IV. Conclusion

1. Internet advertising has been an important driving force for the rapid development of the Internet in the past few decades. It provides a means of monetization for free Internet services and is the key to the continuation of business.
2. Big data is one of the most important fields at present, and Internet advertising is one of the most mature fields for data utilization.
3. The main line of development of Internet advertising is actually transaction form and data monetization, with advertising display form as a secondary line. In this process, various factors and their changes are derived. The specific factors involved can be found in the beginning of the article.
4. Although Internet advertising has evolved into bidding advertising, this does not mean that contract advertising will no longer exist. They are complementary rather than completely substitutive.

Author: A Shui

Source: Ashui