The airlines have developed a sophisticated approach for maximizing the value of ticket pricing. The same approach can work for a TV ad industry combating falling ad rates and viewership. Here's how it's done.
As linear television viewership and MVPD subscriptions ("pay" TV) have shown signs of decline in recent years, more than a few TV ad sellers have been slow to react and have witnessed stagnant and even declining ad rates. Today, while many TV ad sales organizations are using a robust digital tool chest to optimize sales, many others have failed to do so. At a time when they need it most, TV ad sales groups should be leveraging their enormous knowledge of customer behavior and volumes of data in order to get better value from their ad inventory.
To combat secular headwinds, TV ad sellers might look to another industry that has successfully harnessed the power of its customer knowledge and Big Data: the airlines. By adopting a more sophisticated approach to pricing inventory like the airlines have, TV ad sellers might find revenue growth in the face of challenging viewership trends.
In an industry burdened by high fixed costs and perishable inventory, airline companies have invested significant resources into establishing sophisticated ticket pricing mechanisms. To create such structures, airlines capture massive amounts of customer data and use it to develop strategies to maximize value through informed pricing.
In many ways, TV ad sellers face the same pricing issues as airlines do. Broadcast and cable networks are on air 24/7, and ad sellers need to fill time slots or the slots will "fly empty" by running house ads. Despite possessing abundant sales data, some TV ad sellers are behind the curve, relying on simplified, static rate cards to which many sales organizations pay no heed. Outdated practices can undervalue inventory and lower customer retention, which puts immense pressure on business performance. By working with ad sellers to analyze sales data, FTI has identified a number of addressable problems and developed solutions to optimize revenue just like the airline industry has.
Differentiate Inventory and Value it Appropriately
In recent years, the airline industry has moved to differentiate flyer experience. Seat classes, boarding priority, extra legroom, baggage allowances and many other benefits have been parsed out to enhance customer experience and to allow airlines to charge premiums for added benefits. TV ad inventory should be similarly distinguished by the network, time slot and size of Designated Market Area (DMA), which all impact the effective reach of an ad. For example, rate cards are often set by network tier and day part, which may not capture vastly different ratings for networks within the same tier or differences in viewership by time of day. Additionally, while ad sellers often set aside premium sports and event programming to be priced separately from the rate card, little data is used to inform the pricing of such ads. While leveraging abundant available data and selling TV ads by reach sounds like an evident strategy, it is not always employed in practice.
Often, TV ads are sold as "rotators," or ads that can be placed in long-duration (18-hour plus) order windows that are allowed to air in any time slot throughout the day, with the understanding that the advertiser will receive valuable prime time placement some of the time and less valuable overnight or day time inventory at other times. While this practice provides the traffic system with scheduling flexibility, the probability of placement in valuable time slots results in deep discounts to the advertiser versus ads that are sold by the day part. In two recent client engagements regarding broadcast and cable ad sales, FTI found that rotators were sold at a respective 72% and 77% discount to the expected value received by the advertiser. The use of long-duration rotators varies from ad seller to ad seller, but it is a common problem with an observed frequency of from 11% of total spots to up to 50% of all inventory.
To maximize inventory value, ad sellers should "sell by the seat" rather than sell "lottery" tickets that can randomly place customers into first class for the price of a budget economy seat. Although rotators do provide the benefit of scheduling flexibility, ad sellers need to be aware of what the data implies for a rotator's expected value and judicious about rotator usage to avoid hemorrhaging value.
Price to Demand
Perhaps the most sophisticated feature of the airline industry's pricing model is the ability to price to demand. Not only do airlines raise prices based on the expected demand for a flight, but they are also able to use customer buying habits and internet search history to maximize prices whenever demand outstrips limited seat inventory.
Similarly, TV ad sellers who quickly recognize and respond to changes in demand will be able to capture the greatest amount of value for their inventory. As sell out increases and available inventory becomes scarce, TV ad sellers should raise rates in response to market conditions. While this is generally accepted as a wise strategy within the industry, it is not always successfully implemented in practice. In fact, other confounding factors can cause unintended consequences. FTI found in a recent client engagement that a TV ad seller saw price drops toward the end of every month because account executives were sacrificing rate for volume in an attempt to increase their personal compensation.
Segment Customers Based on Willingness to Pay
When establishing pricing, airlines look at total demand as well as the characteristics of each individual customer. Business travelers pay higher average rates for the same seats at the same times. Airline companies often adjust pricing (and services) accordingly, segmenting customers based on whether they are business or leisure travelers.
The TV ad seller who can accurately discern and cater to a customer's willingness to pay premiums will be more likely to achieve optimal levels of price and volume. Many TV ad sellers implement this strategy on a limited basis as evidenced by higher rates in political years and higher rates for deep-pocketed national advertisers than for local counterparts. However, many TV ad sellers do not maximize the benefit of implementing strategies to capture surplus premiums from those customers with higher willingness to pay. For example, automotive advertisers tend to pay higher CPMs than retail buyers, likely driven by a greater expected return on investment for the advertising buy. Empowering a sales organization with data insights can allow sales executives to better segment customers; understand what the customers prefer to buy and how much they are willing to spend for different types of inventory. Airlines increasingly achieve this by relying on big data analysis, and ad sellers should consider following suit.
Value Your Customers
In many industries, businesses encourage loyalty by providing incentives such as points, coupons and volume-based discounts. The airline industry defines best practices by encouraging fierce customer loyalty to a brand family. TV ad sellers, on the other hand, often do a poor job maintaining customer relationships and rewarding customer loyalty. In a recent client engagement regarding broadcast and cable networks, FTI found that advertisers who spend the most total ad dollars with a seller more often pay higher rates than lower spend advertisers for the same inventory. Additionally, customer churn can be up to 40% in a single year, leaving account executives scrambling to make up lost volume by providing lower "introductory" rates.
Ad sellers need to do more to sustain existing customer business, starting with price. Reversing the current correlation by rewarding big volume spenders with more attractive rates can help ad sellers generate more repeat business and reduce reliance on low "introductory" rates to attract new customers.
Employ Multiple Sales Channels
In an industry with minimal variable costs and perishable inventory, airlines are forced to combat the dreaded issue of excess inventory. Getting even a fractional return for unoccupied seats can help bottom lines. To minimize the amount of excess inventory, however, airlines do not simply reduce price but rather leverage alternative sales channels such as travel auction sites, where residual value can be captured from otherwise expiring inventory. TV ad sellers, who experience the same phenomenon of minimal variable costs with perishable inventory, can maximize sales by imposing rate discipline and squeezing value out of low demand inventory through alternative sales channels (such as remnant or programmatic ad buying).
In a sales organization consisting of traditional sales channels where account executives (or agencies) approach local and national buyers, millions of television ads go unsold since it is often not worth the seller's time to sell minimally priced low-tier network or overnight ads. As a result, many TV ad sellers simply give away a significant portion of inventory — as much as 25%-60% of available spots. Rather than giving away that inventory, TV ad sellers could materially grow sales by monetizing all ad inventories through remnant buyer sales channels, while also maintaining and increasing yield on the more valuable inventory.
TV Advertising is Still the Best Option
Ultimately, both the airlines and TV advertising offer the best alternatives for many of their customers. Just as airlines remain the most viable mode of transport for fast mid-to-long range travel across the world, TV advertising provides a combination of audience engagement and reach that cannot currently be replicated today using other types of advertising. Linear television remains the most powerful (and attractive) medium for advertisers. Despite declines in viewership and subscriptions, by leveraging their knowledge of customer behavior and the volumes of data that support it, TV ad sellers can get better value from their ad inventory.