Transcript The nature of demand and pricing for TV ad time

Explaining Prices Paid for
Television Ad Time: The
Purchasing Profile Model
W. Wayne Fu
Nanyang Technological University, Singapore
Hairong Li & Steven S. Wildman
Michigan State University, USA
5th Workshop on Media Economics
Bologna, Italy October 19 & 20, 2007
General setting for the research
• Television advertising is a major industry with
over $50 bil/yr in sales in U.S. alone
• As a consequence, audience measurement and
prediction of ad time prices receive lots of
attention within the industry
• Because commercial media depend
substantially on ad revenues and select content
to increase the profitability of audiences
generated, the pricing of ad time has been a
matter of considerable interest to academic
researchers focusing on media
2
Past research has focused on
audience demographics
• Participants in markets for ad time rely on a variety of
sources of information about the audiences generated by
television programs.
– Advertisers want to know how much programs’ audiences are
worth to them as ways to reach potential customers for their
products
– Program suppliers (networks) want to know how much
advertisers might be willing to pay for access to their audiences
• Lion’s share of the money spent on audience research
services has gone to audience measurement services
(Nielsen in U.S.) who measure audiences in terms of
size and demographic composition
– Demographic measures valued because individual consumers
consumption choices are believed to be significantly influenced
by their demographic characteristics.
3
Hedonic models of ad time pricing
• The intuitive appeal of the demographics-determinesconsumption hypothesis and the prominence of
demographic measures in the reports of the most
prominent audience measurement services led to
development of statistical models of ad time pricing that
viewed programs’ audiences as products and their
demographic components as product characteristics.
• Implicit in these models are the assumptions that:
– there is a common market valuation of each of the underlying
components so that the price of ad time in a program is the sum
of the valuations of each of the program’s audience’s
demographic components.
– Each advertiser purchasing a unit of a program’s ad time values
these demographic components the same.
4
Limitations of hedonic ad pricing
models
• Advertisers want to reach potential customers and
demographic characteristics often are not accurate
predictors of individual consumers’ product choices
• Advertisers turn to other sources of information about
what viewers of specific programs purchase, so
demographics may not be a good proxy for what
advertisers know about audiences
• Because they are not bottoms-up descriptions of the
demand for ad time, hedonic models cannot be used to
examine more fundamental factors influencing advertiser
demand and market-set prices
5
Purchasing Profile Model
Critical elements of the Model
• Advertisers’ profits on advertised products
– Program’s whose viewers purchase higher margin products should be
able to charge more for ad time
• Suitability of advertised products for TV promotion
– More effective are TV ads for promoting products purchased by
members of a program’s audience, the higher should be the
price of ad time
• Consumption composition of a program’s audience
– Price paid for ad time should increase with the number of
products purchased by a representative audience member
– Price paid for ad time should increase with the similarity of
products purchased by different audience members
6
The consumption composition of
audiences and the demand for ad time
• Subject of Wildman (2003)
• Starts with observations/assumptions that:
– Most viewers buy many products, but
– Different viewers buy different products
– Advertisers are only willing to pay for access to those viewers who are
potential customers for their products
• Given these assumptions, it can be shown that the per viewer price
that can be charged for a program’s ad time is likely to increase
– the larger are the sets of products purchased by individual members of
its audience (because more advertisers compete for access to the
audience)
– the more similar are the sets of products purchased by individual
members of its audience
7
Simple example of effect of purchasing
profile similarity on price of ad time
• 2 programs: A & B
– Each captures 100 viewers
• 4 products: 1, 2 , 3, 4
– Advertisers willing to pay $1 for one unit of commercial time for
each prospective customer in the audience
• Half of A viewers are potential customers for products 1
& 2 and half are potential customers for products 3 & 4
• All B viewers are potential customers for 1 & 2
• Program sells 2 units of ad time
• Prices for Ad time?
$.50/viewer for time on program A
$1/viewer for time on program B
8
Empirical comparison of purchasing
profile and hedonic models
• We compare the statistical fit of a representative hedonic
model to a series of PP-based models for explaining
variation in prices paid in upfront market for ad time in
prime time network television programs in the U.S. for
the Fall 1997 TV season
• Hedonic model:
– Price/rating point = f(demographic variables, size of audience,
TV network)
• PP model
– Price/rating point = f(range of products purchased by program’s
viewers, similarity of viewers’ consumption choices, per
customer profit on products purchased by viewers, effectiveness
of TV in promoting products purchased by viewers, size of
audience, TV network)
9
Variables and data sources for hedonic model
Variable
Description
Data Sources
Unit rate*
(30 sec spot price)/rating
AdAge.com; Nielsen Media
Research
Viewership**
# of viewers
Nielsen Media Research
%<$30K**
% earning less than
$30K/year
Nielsen Media Research
%>$60K**
% earning more than
$60K/year
Nielsen Media Research
%female18to49**
% female viewers 18+
Nielsen Media Research
%male18to49 **
% male viewers 18+
Nielsen Media Research
ln%college
females
with a college degree
Nielsen Media Research
ln%females black
% AA female viewers
Nielsen Media Research
ABC
ABC program
Ad Age.com
CBS
CBS program
Ad Age.com
NBC
NBC program
Ad Age.com
*Fall 97; **96-97 season
10
Variables and data sources for
purchasing profile models
Variable
Description
Data Sources
Unit rate*
(30 sec spot price)/rating
Ad Age; Nielsen Media Research
Viewership**
# of viewers
Nielsen Media Research
PPI**
Purchasing profile index of #
products purchased
Simmons Market Research (SMR),
AdAge.com
PPI-HHI**
Measure of similarity of
viewer purchasing profiles
SMR, AdAge.com
AveSalePrft**
Average profit earned on
sale of product in category
AdAge.com, U.S. Census Bureau
AveTVAd/Sales**
Average ratio of ad
expenditures to sales for
products in category
AdAge.com
ABC
ABC program
AdAge.com
CBS
CBS program
AdAge.com
NBC
NBC program
AdAge.com
*Fall 97, **96-97 season
11
Constructed audience variables
• fi: Average fraction for an AdAge.com product
category of a program’s viewers purchasing at
least one product from the Simmon’s product
categories corresponding to each of the top 33
AdAge.com product categories (which account
for 98% of TV ad spending in U.S.)
• PPI: For a program, the sum of the fi for the top
33 AdAge.com product categories
• PPI-HHI: For a program, the sum of (fi/PPI)2 for
the top 33 AdAge.com product categories
12
Constructed profitability and TV
suitability variables
• Component measures:
– Ad$=category ad expenditures [1996, Ad Age]
– A/M=Ad$/(gross margin on sales) [1996, Ad Age]
– PEN=% of U.S. population purchasing products from
category [96-97 TV season, SMR]
– USPOP=U.S. population [1996, U.S. Census Bureau]
– CAT$=Total sales for products in category [1996, Ad
Age]
• AvgSalePrft= [Ad$/(A/M)]/[PENxUSPOP]
• AveTVAd/Sales=Ad$/CAT$
13
Predicted signs for critical PP
model variables
• PPI +
• PPI-HHI +
• AvgSalePrft +
• AveTVAd/Sales +
14
Comparison of hedonic and simplest
PP model for Unit Rate
Variable
Hedonic Coefficient
PPM1 Coefficient
Constant
-1.749
-15.122**
lnViewership
-0.041
0.143
ln%<$30K
-0.369
ln%>$60K
0.319
ln%female18 to 49
1.415**
ln%male18 to 49
0.015
ln%females from college
-0.358
ln%females black
0.020
ABC
0.189
-0.099
CBS
0.492**
-0.010
NBC
0.144
-0.092
lnPPI
6.434***
R2
Adjusted R2
0.683
0.592 ***p<.001
*p<.05, **p<.01,
0.510
0.449
15
Building to the complete PPM
Variable
Constant
PPM1 Coef
PPM2 Coef
PPM3 Coef
PPM4 Coef
-15.122**
-28.983*
-33.943**
-24.041
lnViewership
0.143
0.272
0.227
0.322*
ABC
-0.099
-0.129
-0.104
-0.064
CBS
-0.010
0.073
0.138
0.188
NBC
-0.092
-0.098
-0.048
0.019
lnPPI
6.434***
2.258**
1.466**
1.956**
0.752**
0.756**
0.659*
1.519*
1.449**
lnPPI-HHI
lnAveSalePrft
lnAveTVAd/Sales
4.852*
R2
0.510
0.542
0.601
0.635
Adjusted R2
0.449
0.472
0.528
0.556
*p<.05, **p<.01, ***p<.001
16
Assessment of PPM
• Even though data is highly aggregated (thousands of
products and brands collapsed to 33 product categories),
full model explains about as much variation in prices as
hedonic model
– Would expect model with more refined data on advertised
products to do even better
• Supports a basic bottoms-up model of advertiser
demand
• Reveals importance of homogeneity in viewer
purchasing behavior as factor influencing price
• Points to more sophisticated viewer-as-consumer
models of programming competition
17
Implications for programming
strategies
• Traditional economic models of program choice predict that
programs of different types will be supplied in proportion to the
fractions of audience that want to see them
– Audience maximization models based on assumption that all
(demographically similar) viewers are worth the same
• Our research shows that viewers are consumption differentiated and
thus differ in their contributions to programs’ ad revenues in ways
that should be reflected in networks’ programming strategies
• Wildman (2003) and Kim and Wildman (2006) predict that program
types that attract more consumption homogeneous audiences will
be supplied in greater numbers than audience size alone would
predict
• The empirical study reported here says we can expect the same for
program types attracting viewers whose product purchases generate
higher profits for advertisers and viewers who purchase products
well-suited to television promotion
18