By: Keith Lloyd Smith, co-founder and CEO of Payability
As an industry, digital advertising has made incredible progress over the past decade. We figured out how to make ads more relevant to consumers, we’ve consistently increased the revenue generated for each ad, and we’ve even determined how to deliver an ad at lightning speed.
However, despite all this progress, our supply chain — web publishers and app developers — is still suffering from an archaic payment scheme. It’s the end of the month before cash can be collected for ads delivered at the beginning of the month. And in many cases, it’s 30, 60, or even 90 days after the month ends.
Sadly, things appear to be getting worse. Some advertisers now enforce Net 60 payment terms, with others demanding terms as long as Net 150. That’s a full five months between the time the publisher provides the service and the moment the advertiser pays for it.
Cash sustains a supply chain, and if digital advertising is going to be truly sustainable, then our industry needs to learn from other industries how to create a sustainable level of cash flow for the entire ad tech supply chain.
Publishers Pay the Price
These delayed payment practices can be devastating to publishers. Many lack the cash reserves necessary to handle this burden. Money leaves their accounts daily and only comes in once every 45 to 60 days.
Publishers have two options when dealing with this erratic cash flow: They can either hoard an unusually high amount of cash that stagnates growth and prevents them from taking on more projects, or they can increase borrowing and shoulder the burden of interest fees and higher agency costs.
What’s worse, it doesn’t appear that advertisers are willing to budge on this. Some large companies, like InBev, are committed to keeping extended payment terms for as long as possible. Others, like Mars, are seeking to expand existing payment terms even further.
It’s a sad sort of irony that a practice designed to provide an illusion of higher cash holdings for advertisers continues to hamper the actual cash holdings of hardworking publishers and marketers.
Why Does It Matter?
Influence Mobile — a company that develops custom rewards programs for sports fans — buys online ads to grow its mobile audience and then monetizes those mobile users with advertising dollars through a series of online ad marketplaces. The company had good margins, but its growth was hindered by limited cash flow. Advertising channels extended the company very little credit because it was new. This cash flow gap is typical for many app developers and publishers, and it’s difficult to overcome.
Influence Mobile recently signed a financing arrangement to have its ad marketplace pay every week for the prior week’s reported earnings. This instantly made a positive impact on cash flow and allowed Influence Mobile to scale its advertising efforts — resulting in nine times the daily revenue.
How Can We Fix This?
Publishers of all sizes need industry-wide change that standardizes shorter payment terms. This current imbalance of credit poses a massive threat to the entire industry, and unless publishers and the government act to change the standard, advertisers will continue to use their financial muscle to get their way.
Publishers who are paid faster can more quickly develop the quality audience that advertisers need. Increased cash flow means that publishers can make the necessary investments to advance their products, meeting a primary need of advertisers.
Keith Smith is co-founder and CEO of Payability, which provides the capital and platform to enable online marketplaces to offer early payment programs to suppliers. Previously, Keith founded CyberMortgage and Zango and served as co-founder and CEO of BigDoor. Keith also lends his time to early-stage startups via Techstars and serves as an advisor, investor, and board member for multiple tech startups.