By Nick Carrabbia, EVP, OAREX
As ad budgets tighten and CPMs drop, it is more important than ever to ensure that supply partners work with the most effective demand partners. Depending on where you are in the digital media ecosystem, the list of possible demand partners continues to expand. Supply partners can monetize with varying SSPs, exchanges, or ad networks. In some cases, they may have a direct deal with a DSP, agency, or even a brand. Clearly, the CPMs/CPCs are important, but other factors should be considered when choosing a partner.
Supply partners currently using or evaluating a demand partner should understand what they want from a partner. For example, a DSP that goes beyond a single-point solution is frequently preferred over one that does not. But how transparent are they about their demand stack? Will you start monetizing only to find out a month later that your demand partner took a significant loss and is destined for bankruptcy?
To help effectively evaluate a demand partner, look for the following five red flags. If any are raised during your research, you may want to move on to the next.
Red Flag One: The Terms Aren’t Clear
Review the terms of service to ensure they’re clear, preferably encapsulated in an actual contract rather than just a digital-only version that may be hidden online and changed at any time. Regardless, make sure to read and understand the terms. Ask questions if something seems odd or unclear. Also, keep in mind that the demand partner may include clauses within the terms that allow them to not pay if they are violated, even if the violation is not material. Make sure the stated terms are clear and that you can work within them.
Red Flag Two: The “Melt Up”
Occasionally, a demand partner may start paying suspiciously high CPM/CPCs compared to the competition. So suppliers are lured in and start working with them, only to see the demand partner go up in smoke. We call this the “Melt Up,” which can happen in many situations. In some cases, VC-backed companies may have investors banging down the doors for growth, or maybe a startup comes in and aggressively tries to buy market share. The result is almost always the same – if the demand partner is paying too much, they will eventually collapse. One can only run a negative margin for so long before going under. If you see this happening, take a deeper dive into the partner’s performance and proceed with caution.
Red Flag Three: Lack of Reporting Transparency and Suspicious Offsets
Consider this scenario: Your demand partner’s portal says you earned $100k, but when the money comes in, you only get $97k. While it may not seem like a big difference, if you are running on tight margins, even a 2 or 3% change in revenues is a big deal. This is especially true if the offset is attributed to “robotic traffic,” even though the demand partner says they monitor robotic traffic in real time but can’t give evidence of the disputed traffic. Offsets, especially significant ones, if unexplained, mean that the demand partner may create even larger offsets in the future. Unfortunately, there are times when 50-100% offsets are explained as “robotic traffic,” but no rationale or evidence is provided. This is absolutely a red flag that should make you move in another direction – and quickly.
Red Flag Four: Late Payments
Late payments are the canary in the coal mine for digital monetization partners. When a company is troubled, the first thing they do is pay late. When evaluating a partner, a good hack is to check for reviews and visit sources such as Reddit to see if anyone reported partner payment problems. If you are currently working with a demand partner, track whether they are paying late and if they are, keep track of the frequency of late payments. Some demand partners consistently pay a few days late, which is an inconvenience and a cost but may not indicate a problem. However, if late payments begin occurring suddenly or become significantly delayed, you should definitely beware.
Red Flag Five: Sequential Liability
Almost all demand partners do it – if they don’t get paid by their demand source, then they don’t pay you. This is called sequential liability and it exists in most terms of service these days. If the demand partner is getting their demand from a diverse set of sources and large programmatic payors, then sequential liability is less likely an issue. However, if the demand stack is highly concentrated from a few sources, there can be real risk. There are several examples of supply partners getting burned by sequential liability (i.e. Sizmek or Defy Media). So again, check the terms of service and if they include a sequential liability clause, know the risks.
Choosing the right demand partner is important to ensure your business is running smoothly, cash flow keeps coming, and you aren’t being taken advantage of through sneaky clauses or unfair terms. Do your homework, complete a risk/benefit analysis, and find the right partner for your business.