Advertising Inventory and Rates: Part 1 - Supply and Demand

The basic economic principle of supply and demand states that...

The larger the supply of inventory I have of a product or service the larger the demand I need to support prices for that supply.supply and demand 01 resized 600

If there is more demand than supply, it would be easy for me to raise my prices.  In a free market, if I have a larger supply than demand, I may need to lower prices in order to create more demand so I can sell my inventory.

So, how does “supply and demand” apply to media outlets selling their advertising inventory?  It would seem simple—if they have a lot of inventory to sell, they would sell it at a lower price. Or, if they had limited inventory, they would sell it at a higher price, and in many cases, they do price their inventory this way.

However, when humans are involved and businesses and salespeople are trying to maximize revenues and margins, things are rarely simple.

First, every medium is different, and this influences the rate structure and fluctuation for a given medium.  

Broadcast media (radio and TV) have a finite supply. There are only 24 hours in a day, so if their content was strictly commercials, the most they could sell is 24 hours worth of airtime per day.

  • We know that they don’t only run commercials or nobody would listen or watch their station.
  • We also know the demand for their content decreases at different times of the day, such as a smaller audience during overnights (Midnight to 6AM).
  • Further, viewers and listeners tend to be fickle and change monthly if not weekly what kind of content they are interested in.
  • So, the demand side of the equation for Radio and TV is always in flux—the demand for their content. This creates a lack of visibility for the advertiser into the available inventory/supply of broadcast media along with the demand for its content.

Ultimately this all leads to a volatile pricing model for the TV and Radio industry and monthly, weekly, and sometimes daily price fluctuations of their inventory (rate cards) and oftentimes non-standardized pricing models.

Different rates are bought daily for the same type of inventory depending on if you’re a local agency vs. national agency, whether you’re a friend, or it’s political, etc., etc.

Print is a little different because a publisher can just print additional pages if they run out of supply; however, there’s a cost in the form of ink, paper, and people for the additional pages, so there isn’t an infinite amount of supply after all.

Print has higher cost structures when it comes to overhead, human resources (writers, editors), distribution, and capital expenses than the other media, so they have a minimum price they need to set in order to break even.

  • The problem publishers are experiencing now is that their minimum price based on their cost structure in many cases isn’t perceived as being as valuable as other mediums; they are having a tough time competing, so demand for their product is down.
  • Many major print publications have closed operations recently and/or are starting to lay off people and move their content online.

I think you’ll start seeing a more fluid pricing model in the print world in the near future, so be ready to take advantage of it. Online has changed the game.  The problem with online is that there is a seemingly infinite amount of inventory, and the demand for that inventory varies widely across the spectrum of no-demand to high demand.

  • Since the internet can create what seems to be an infinite amount of supply, many internet advertising publishers have been forced to change their revenue generation models from paying for view/impressions to paying for actions/clicks or conversions/leads (performance-based).

But for the most part, the internet is very similar to Radio, TV, and print for one reason—no matter what the supply side holds for each medium, whether it be finite (print, broadcast) or infinite (online), there is a finite amount of demand. This means there is a finite amount of people in the US and world, and there’s a finite amount of time they can spend consuming content in any medium.

Part 2 on Advertising Inventory & Rates will be posted later this week, with tips on negotiating advertising rates no matter where in the supply/demand curve a medium falls.

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