Engagement Rate is the Margin Squeeze in Digital Advertising

Engagement Rate is the Margin Squeeze in Digital Advertising

Engagement rate, the percentage of the audiences that consumes a particular piece of editorial content, creates the biggest squeeze on digital advertising profits.  The advertising profit contribution of media is defined by the advertising revenue produced from page views minus the costs to create the content and sell the advertising. Unlike print media that uses circulation and pass-along rate to define a sellable inventory of page views, digital media uses audience size and engagement rate.  While pass-along rate acts as a page view multiplier on circulation, engagement rate is a page view filter on audience size.  The consequence is that the engagement rate puts a squeeze on advertising profit margins.

To illustrate this point, the infographic below benchmarks the advertising profit contribution of ad sales and editorial of print vs. digital.  As in previous comparisons, this example assumes the print product is a 50-page magazine with 30 advertisements which means for every additional page of editorial the sales team needs to sell 0.6 ad placements.  On the other hand, for every page of editorial in digital the sales teams typically needs to sell 4 ad placements which is an increase of 6.7 times more insertion orders vs. print.  On the surface, it appears like the increased cost of sales would result in more revenue (i.e., 4 ads vs. 0.6) but this is where engagement rate impacts the revenue and profits.

Scout® Research consistently finds that the engagement rate for an individual piece of the editorial is rarely above 10%.  Average engagement rates across all editorial within a site are usually below 10%.  So at a 10% average engagement rate, which is very good, a page of digital editorial in the infographic example will generate 50,000 sellable advertising impressions (i.e., 100,000 members X 10% engagement rate X 4 ads per page view + 20% additional from fly-bys).  In contrast, the 0.6 ads per page in print multiplied by 100,000 circulations and the 1.75 pass-along rate results in 105,000 sellable advertising impressions.  To make up for the drop in sellable impressions, the digital editorial team has to create two times more content.

In other words, to get to the same revenue assuming digital and print CPM consistency, the digital team has to sell 6.7 times more advertising and produce 2 times more content.  This is the advertising profit margin squeeze.

Engagement rate has at least two immediate implications.

The first is that given the impact on advertising profits, engagement rate is an important new metric for managing digital.  The engagement rate informs the publisher about the priorities for profits.  With a low engagement rate, a publisher needs to improve profits through audience development.  With a high engagement rate, a publisher needs to improve profits through more editorial.

The second implication is that engagement rate creates a structurally different profit model for digital advertising compared to print.  A structural difference that cannot be overcome except through diversification of the revenue model or a rethinking of advertising.

Importance of Analyzing Unit Cost of Engagement in Advertising

Importance of Analyzing Unit Cost of Engagement in Advertising

For publishers, analyzing the unit cost of engagement in advertising identifies revenue optimization opportunities.  In the next few blog entries, I’ll explore why and how to analyze the unit cost of engagement for ad orders.  This first entry in the series addresses the following questions:

  • What is engagement?
  • What is the unit cost of engagement, and how is it calculated?
  • Why is calculating unit cost important?

What is engagement? For advertisers and publishers, engagement is the length of time the audience spends with media and ad.  Engagement is one of the few scarce commodities on the Web.  An audience member’s options for news, entertainment, socializing, purchasing, and learning are exploding, and like it or not even with the mobile explosion, any one person has a limited amount of time to provide on any given day.  A publisher’s success is premised on maximizing its share of audience time (i.e., engagement) and the revenue it produces.

Today, the publisher’s standard for engagement mistakenly measures the page views rather than the length of time.  Using today’s standard, there is no difference between impressions that last 1 second, 10 seconds, or 2 minutes which of course doesn’t make sense.  Research has shown that the longer a person is exposed to a web page containing an advertisement the more likely they are to remember the advertisement.  Additionally, engagement enhances direct response advertising as a recent study published by TidalTV showed click-through rates of targeted ads increase as engagement increases.

What is the unit cost of engagement? Using a length of time as the measure for engagement, the unit price of engagement is simply the price paid by an advertiser for each second an impression is delivered to an audience member.

"Demand Map for Advertising"

How do you calculate it? The simple answer is to take the total revenue of an ad order and divide it by the total length of all impressions delivered as part of the order.  The chart to the right illustrates the unit cost of engagement.  In this chart, two advertisers pay the same $100 CPM rate to a media publisher for the same target audience.  The first advertiser’s order resulted in 5,000 impressions with an average length of 10 seconds each or a rate of $0.01/second.  The second advertiser’s order resulted in 5,000 impressions with an average length of 120 seconds each or a rate of $0.00083/second (12X lower rate for engagement).

Why is calculating unit cost important?    With all other factors equal, research has shown that increased engagement improves ad campaign performance in both direct response and branding.  By calculating the unit cost of engagement for ad orders, publishers can identify which orders were overpriced and which were underpriced.

Overpriced orders have lower engagement per dollar and lower conversion/recall rate per dollar.  Advertisers with overpriced orders are less likely to advertise in the future representing revenue risk (e.g., the first advertiser in the example).  Underpriced orders have higher engagement per dollar and higher conversion/recall rate per dollar.  Advertisers with underpriced orders are more likely to accept a price increase to continue targeting the publisher’s audience (e.g., the second advertiser in the example).

By knowing which audience segments have higher engagement and which advertisers are receiving good value, publishers can price discriminate to optimize their revenues.  In the next post, I’ll cover the quantitative method for establishing the unit cost of engagement.