What Are Online Advertising Exchanges?

Online advertising exchanges are a different way in which advertisers and publishers (web site owners, bloggers, etc.) can improve the efficiency of their advertising campaigns. Advertising exchanges accumulate all available ads, enhance those ads with different data and images to target given buyers, and then sell ad impressions to the highest bidding advertiser. In essence, advertising exchanges work by distributing ads (supply) through impressions (demand). Advertising exchanges are efficient because they are able to target a defined consumer group, customize the ad to that group, and then track the performance of each advertising element within the placed ad.

Until now, advertisers used advertising networks in order to place online ads. This involved matching publishers who wanted to monetize their advertising space with the advertisers' sales inventory and goals. Ads were placed either by user intent (keyword used) or the web site theme. Publishers were paid either by the volume of page impressions (cost per thousand, or CPM) or ad clicks.

The problem with this model is that an advertising system based only on keywords or web site themes is highly inefficient. A user who uses the keyword "perfume" in a web search may be looking for the history of perfume, a guide on how to make perfume, or a place to purchase perfume. A web site dedicated to the topic of perfume may actually be discussing perfume allergies and other issues rather than how to select and purchase perfume. Meanwhile, the advertiser is displaying an ad that encourages the user to buy a particular perfume brand without taking into account the user's true search intent or the web site's actual message.

Another problem with relying on advertising networks is that advertisers display their ads and pay publishers on the basis of page impressions or ad clicks. Meanwhile, a web site's popularity may be based on a completely different product or subject matter compared to what the advertiser is trying to sell. Ad clicks, even if performed, may be due to users being misdirected by the web site's message rather than anything inherent in the ad. When only the volume, rather than the quality, of visitors is focused on, the advertiser usually loses.

As a result of these issues, ad exchanges have become more popular with advertisers. How do ad exchanges actually work? Using real-time bidding (RTB) platforms, the ad exchange receives a request to display an ad from a user's browser. The exchange presents this opportunity to advertisers and also sends important user data such as the time of day, location, available demographics, and even search history (if available). The advertisers then make a real-time decision on whether they will or will not choose to display their particular ad to the user. Should an advertiser agree to display an ad, that advertiser also submits a price he or she is willing to pay for the impression (typically given in CPM). The RTB platform takes all price bids and selects a winner. This winner's ad is then served to the user.

What advertising exchanges are already in existence? Microsoft and Yahoo have owned AdECN and Right Exchange, respectively, since 2007. Google owns DoubleClick Ad Exchange, while AOL owns Advertising.com. New exchanges include Open Mobile Ad Exchange, introduced by Opera Software, the MobClix ad exchange, and Brightroll, which is a video ad exchange.

Because ad exchanges target specific audience demographics, more thorough research and analytics will be required if advertisers intend to capitalize on these new advertising platforms. Based on a user's country, the language used, search time, web site content, past ad performance, or even another variable, an adaptive algorithm generates and serves a custom ad. Such an ad environment no longer provides a single, "perfect" ad. Instead, a variety of ads, ad backgrounds, contents, and features are selected and used. As a result, advertisers will need to develop a database of images, descriptions, and action elements, and then determine what the return on investment (ROI) will be for every generated element.

The bottom line is that advertising exchanges offer advertisers more direct control and input during the advertising process. By creating a series of ads, analyzing their return-on-investment (or ROI), and then making improvements on those elements, advertisers can generate a more efficient and effective online advertising campaign. On the publisher's side, better targeted ads mean that quality visitors are brought to the web site, resulting in higher product sales. Since publishers often earn a sales commission based on product sales, better targeted ads are beneficial for them too.