Just how much more should advertisers be paying for digital inventory and why? Jens Depenau, Senior Media Consultant, Digital, at Ebiquity Germany, attempts to resolve confusion in the German digital market and to pin down the sometimes slippery concept of inflation.
The status quo
Looking at different digital inflation indices calculated by agencies, it is clear that there is no standard, industry-wide approach. This lack of transparency often results in protracted discussions and negotiations between agencies and auditors – including ourselves – especially if contracted KPIs need to be adjusted in advance. The trouble is that different indices yield different results, even if the databases underlying them contain the same information.
How can this be? The answer, it turns out, depends whether agencies use pool inflation or market inflation as the basis for their index.
The most-used inflation method worldwide is based on a pool calculation. This means that average CPMs of broad categories are compared, year-on-year. The method is very easy to handle and offers good insight into how the digital media sector is changing over a short time period.
However, budget-intensive placements can have a significant impact on average CPM rates. Consider the growth of Facebook, for instance, or the explosion of premium video in recent years. Average CPMs are dependent on concrete placements within the pool. This is why agencies calculate sporadic, additional subindices – for example related to the video category – alongside the overall inflation index. But is this enough? The answer is not that easy to give, thanks to the sheer number of variables at hand and the complex ways in which they interact.
Before answering this question, it is important to describe the market inflation method. All common definitions worldwide, such as the German DAX (blue chip stock market index), describe inflation as an increase in the general price level of goods and services. To be more precise, it shows the increase in the general price level of the same goods and same services, like for like. And this is why indices differ so wildly in the digital media sector, with all their multiple variations. Market inflation methods can yield useful, workable results if the price level of specific placements increases or decreases. What’s more, only market inflation methods work if a client’s contracted KPIs need to be calculated prospectively.
Why both methods matter
Our analysis suggests that both methods are important because they offer different components of the required answer. If the question is whether high quality websites or formats have become more important within the digital media market, an increase of the price level (i.e., pool inflation) offers a good indicator. In combination with the market inflation measure – which means that changes due to higher prices would be excluded – pool inflation indices can be an incredibly good way of describing the changed structures and qualities of the digital media industry.
InflaX-E in Germany
Following discussions with media agencies in Germany concerning inflation indices, our digital team has developed a unique market inflation approach which is easy to adopt and fully transparent. The so-called InflaX-E (Inflation Index Ebiquity) is based on 100 budget-intensive placements that are booked constantly over four years. This means that three inflation indices are available overall, per placement and per category; per category, we analyze a combination of placements relating to environments including portals and networks, or particular formats such as video. Every broad category inflation index is a result of budget-weighted placement indices.
In sum, the InflaX-E method ensures that every subindex is connected within the overall index. And most of all, the index is independent of new budget-intensive placements, which can unfairly skew results. Only after four years of budget-relevant bookings can new placements be introduced as one of the 100 that contribute to the market inflation database. Until that time, new entrants are deemed to be important, but only within each year´s pool inflation evaluation: not overall.
Results in Germany
Applying the InflaX-E methodology to the German market shows a net deflation of -0.4 percent for 2014–15. In addition, two important, budget-intensive subindices for this market over the year are video formats, which experienced -7.6 percent deflation, and networks, with -1.1 percent deflation.
We are confident that this new methodology is more comprehensive and reliable than previous indices, and we are looking forward to applying this approach to other markets across the global Ebiquity ecosystem.