Latest / The Yield Doctor with James Deaker / Why Target Sell-Through Rates Are a Massive Mistake

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Why Target Sell-Through Rates Are a Massive Mistake · The Yield Doctor with James Deaker

• 0:00
  As the yield doctor, I often get asked,
• 0:03
  "What should our sell-through rate be?
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  Should we target 70%, 80%, 90%?"
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  And my answer may surprise you. I
• 0:13
  usually say that we should not have a
• 0:16
  target sell-through rate at all.
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  Absolutely, you should monitor it. You
• 0:21
  should understand why it is changing and
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  you should use it in your financial
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  planning. but turning it into a target
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  can lead to some very bad pricing
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  decisions and some very bad inventory
• 0:36
  decisions. So today I'm going to be
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  talking about the dynamics of a
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  sell-through rate, particularly in the
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  case of publishers who have direct sales
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  teams. I'm going to talk about how it
• 0:48
  should be used and how you should think
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  about what happens when it changes. I'm
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  going to be comparing a range of
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  different sellrough rates and talk about
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  the signal and what it term means in
• 1:00
  terms of market demand and then also
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  what it means in terms of the stress and
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  the actions that it causes inside the
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  company. And I'm going to focus on the
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  direct sell-through rate, which is the
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  total number of impressions sold by your
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  direct sales team. And the denominator
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  is all of the impressions on the website
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  that are available for sale by that
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  sales team. There are a lot of other
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  related concepts like fill rate or
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  premium sell through or programmatic
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  sell through, but for today I'm going to
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  be focusing on direct.
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  So firstly, why does the idea of a
• 1:41
  sell-through rate keep coming up again
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  and again? And one reason is that in
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  many businesses, the sellrough rate
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  contributes directly to the
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  profitability. And in particular, in
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  other industries that focus on yield
• 1:57
  management. So if we take the airline
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  industry for example, they usually fly
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  somewhere between 80 and 85% full. If
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  they are less than say 65% full, they
• 2:10
  are likely to be unprofitable.
• 2:12
  And so I've talked in other videos about
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  the differences between yield management
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  in the airlines and in digital
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  advertising. But in this case, the
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  difference is critical because it leads
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  to very different ways of thinking about
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  the businesses. The airlines have
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  significant both fixed and variable
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  costs. Whereas digital publishers have
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  fixed costs associated with the people
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  and with the infrastructure but the
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  incremental cost of serving an extra
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  thousand ads is tiny. So the sellrough
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  rate is far less relevant in digital
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  advertising.
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  But if you have a company who has hired
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  a CFO who is new to the digital
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  advertising industry, it may be one of
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  the first questions that they ask or one
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  of the first things that they want to
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  get into. Also, for a company running a
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  retail or commerce media network, they
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  may find that they get asked a lot about
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  the sell through if that concept or the
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  load rate is very important in the
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  mainline business.
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  I've talked in other videos about the
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  concept of a Goldilocks metric. And
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  these are metrics where you don't want
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  them to be as high as possible or as low
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  as possible. You just want them to be
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  within an acceptable range and you want
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  to monitor when they leave that range.
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  And I'm going to link to the video right
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  here. But one of the takeaways from that
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  video is that these types of metrics,
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  there's a lot of good information to be
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  gleaned from monitoring the levels and
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  the trends, but you definitely shouldn't
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  target on them. All right, so let's
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  think about the extremes of a
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  sell-through rate and see what happens
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  within an organization. And let's start
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  with the relatively easy question or
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  situation of a sellrough rate of zero.
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  The only time when hopefully this
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  happens within your organization is if
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  you're just starting out or you are just
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  about to launch a new site or a new ad
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  product. In all other cases, that means
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  that basically people or the market
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  don't want what you are selling or at
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  least not at the price that you are
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  selling it at.
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  So how does that feel internally? Well,
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  the stress levels are going to be high.
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  People are going to be running around
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  asking questions around whether we've
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  got all of the potential customer
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  feedback, whether we've looked into
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  pricing, whether operations are working
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  correctly. And honestly, that's not a
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  great environment to be in. But let's
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  think about the opposite end of the
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  spectrum. What happens when we get close
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  to 100% sell through? 100% sell through
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  is also a pretty rare situation to be in
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  or at least exactly 100% because in
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  practice that requires something like
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  one advertiser coming in and buying all
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  of your inventory for the entire month
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  and that's not a very common situation.
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  There are a lot of situations where you
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  get close to 100% sell through and in
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  those situations a number of problems
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  can also present themselves. The first
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  is that you have to deal with
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  advertisers who want the same
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  impressions or have campaign dates that
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  may start at the same time and you might
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  have to say no to them. you may start to
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  deal with problems where if there's any
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  operational issues like downtime, then
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  you're going to end up in a situation
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  where you can't deliver all of the
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  impressions to your end advertisers.
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  Also, because in an advertising
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  environment where your inventory comes
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  from users on your site or using your
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  application, you're constantly worried
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  about whether all of those users are
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  going to show up consistently and
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  whether you're going to be able to
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  deliver. And finally in this world um if
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  someone is going to ask a question uh
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  internally they may very validly ask if
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  we are 100% sold through shouldn't we be
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  selling our inventory at a higher price
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  and that's a pretty valid question to be
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  asking if you're 100% sold out
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  consistently.
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  So, even though financially it is
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  obviously much much better to be 100%
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  sold out than 0% sold out, I'm going to
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  assert that the organizational stress
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  can be just as high when you're at 100%
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  sellrough rate as if you're at 0%
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  sellrough rate. So, somewhere in between
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  zero and 100% is the point where the
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  organization feels like the sellrough
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  rate is at an appropriate level. And
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  that level is going to be very different
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  for every business. There are a range of
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  different conditions that are going to
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  necessitate whether you're at that
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  healthy sell through rate or not. And
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  one is how predictable is your inventory
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  level. I've already mentioned there are
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  situations where it can be very
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  variable. Another is how your seasonal
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  demand changes. Many businesses have a
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  very high Q4 and they're weaker in
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  demand. the rest of the year. Another
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  might be how much of your inventory
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  needs to be reserved for late arriving
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  demand, particularly if you want to
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  reserve uh the inventory for some
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  specific segment or class of customers.
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  Another factor that plays into how high
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  you need your sellrough rate to be is
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  what is the alternative to your direct
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  sales team. For example, do you have a
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  strong programmatic alternative so that
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  if your self if your team, your direct
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  sales team is not selling out and it
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  defaults to programmatic that you're
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  actually losing very little. Another
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  factor that plays in is how
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  differentiated or scarce your inventory
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  are and how often you need to do underd
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  delivery or make goods. So that's at
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  least six different factors that are all
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  going to play into what is an
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  appropriate level for a good
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  sell-through rate within your company.
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  Another thing to be wary of is the idea
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  of anchoring to a specific price. You
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  are going to face stakeholders
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  internally when you start to talk about
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  sell through that are going to come in
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  with their own biases around what a good
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  or bad sellrough rate is going to be.
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  And you need to keep that in mind. They
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  this happens all the time. Maybe they
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  have spent time in another industry or
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  on a website or an application that has
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  very different dynamics and they're
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  going to assert that the sellrough rate
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  in your company should be similar to
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  what they've seen in in the past. And as
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  I mentioned earlier in this video, this
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  is particularly common in retail and
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  commerce media networks. And in those
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  businesses often you see a dynamic where
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  the advertising business is compared
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  against the sellrough rate or the load
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  rate in the mainline business.
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  One other thing I'll I'll say about the
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  sellrough rate and the organizational
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  response is that sometimes in fact many
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  times it is not about the absolute level
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  of the sellrough rate. It's about the
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  changes from one period to the next,
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  whether that's one week to the next or
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  one year to the next. And the reason is
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  that you could have a very respectable
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  sell-through rate, but if it's lower
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  than it was at this time last year,
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  you're going to have a lot of people
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  running around asking questions because
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  often it's a sign that demand has
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  softened. However, you can have a lot of
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  good reasons why sellrough rate has
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  dropped. And those reasons could
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  actually be good for your business.
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  Maybe you acquired a new website or you
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  launched a new property and so there is
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  a lag before you sell it out. Maybe you
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  increased your ad load on the page and
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  so you have additional impressions that
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  you need to fill. Maybe the direct
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  sell-through rate dropped because other
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  channels like programmatic have such
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  high demand they start to crowd out your
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  direct sales team. Again, this is a good
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  good problem to have. So, all of these
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  potential dynamics are reasons not to
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  set a specific target for next year or
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  for next quarter. And instead of asking
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  yourself questions like, is our sell
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  through rate high enough? Ask the
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  following questions. Number one, what is
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  changing? Is the sell through rate
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  rising or falling? And where? meaning on
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  what products or in what regions in your
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  business. What is changing within your
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  business? Is it the demand? Is it
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  pricing? Is it inventory growth, ad
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  load, product mix, channel mix? There's
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  a lot of things that can be changed that
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  could be driving the changing sellrough
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  rate. Is the change economically good or
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  bad? a falling direct sell-through rate
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  because programmatic demand has exploded
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  is excellent. Uh a rising sellrough rate
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  because sales discounted heavily might
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  be terrible.
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  And then the last thing to ask yourself
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  once you've been monitoring all these
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  things is does it require an action? Do
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  you need to change your prices, change
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  how inventory is allocated,
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  increase the inventory? Is there a
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  problem in fact that needs to be fixed
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  or can you do nothing? So all of that is
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  how I think about sell through rate. You
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  need to monitor it. You need to
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  understand it and you need to use it as
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  an input into your financial planning.
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  But don't use it as an arbitrary
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  organizational target. The sellrough
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  rate is a diagnostic metric. It should
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  not be your objective function. If
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  you're struggling with these kinds of
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  yield question in your business, please
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  reach out. I am James Deika. I am the
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  yield doctor.