Today, one of the biggest opportunities for publishers are native advertising formats–provided they roll out a native ad stack with caution. Publishers might fail to realize the true potential of native formats if they follow the path of fragmenting their monetization stack between the core ad serving platforms and real time bidding systems like they did for banners.

Centralizing the decision on which campaign/creative to be served will generate the highest revenue for publishers. However, in today’s banner ad-stack, the decision is broken into two systems: DFP/first-party ad server and network optimizers. For premium formats like native inventory, publishers should not break the above decision in the way that they did for banners because this will fail to achieve the full revenue potential offered by native advertising.

Let’s take a look at why with a little bit of history and math:

How did banner ad technology evolve for publishers?
First there were ad-servers for managing campaigns directly sold to advertisers. Publishers quickly realized they couldn’t sell 100% of their inventory so they started building relationships with networks.

Running a network isn’t rocket science (after all, it’s just media arbitrage) and, consequently, hundreds of networks popped up. It became one hell of a job to manage multiple networks until SSPs (network optimizers) came along to rescue publishers.

While publishers were optimizing their inventory, advertisers started to buy publisher’s inventory through Real Time Bidding (RTB) exchanges in addition to the old school process of cutting manual IOs and RFPs. In the process, publishers fragmented the final decision of which ad creative should be served into two completely separate silos.

Publishers would first use their own ad server to fill inventory with direct campaigns and then let the exchanges try to fill the remnant inventory. They assumed that the yield from exchanges would never exceed the yield from their direct business. If that’s always true, it makes sense to serve direct sold campaigns over indirect campaigns. Unfortunately, it’s not always true.

Where do native formats fit in?
Native inventory is premium. Assuming direct campaigns are always more lucrative could be costly and require a new ad serving model. Native formats need a modern ad stack that lays the foundation to ensure publishers make premium eCPMs irrespective whether they are selling it direct or indirect.

The ad stack should allow publishers to run direct campaigns but also auction every impression (to multiple demand sources) to compete with direct campaigns. This holistic ad serving approach optimizes a publisher’s yield by serving the right creative for every impression.

Here’s an example:

Let us assume a Publisher A has 100,000 impressions for her native formats and she can directly sell 25% of them. She wants to backfill the rest from networks & exchanges with a backfill CPM floor of $2.

1. Silo Ad-Server

The first ad-server runs through 25,000 impressions with an eCPM of $10.50 and the indirect backfill is given an opportunity to fill 75,000 impressions. The backfill exchanges monetizes at a $3.40 eCPM with 80% fill-rate.

See the revenue and breakdown below:

2. Holistic Ad-Server

But if both direct & indirect were served from the same system — a “holistic ad serving” approach — they could realize that the fill at any given price level is a direct function of how much inventory is made available, rather than the absolute impressions.

Let’s imagine the indirect backfill could monetize the publisher’s inventory at $6 CPMs. That could end up being 15% of the overall inventory they can make available. In other words, the publisher would fill more impressions at this price from indirect campaigns than direct campaigns.

Now that the system knows the eCPM from every source for every impression, it can prioritize to serve $6CPM in-direct demand than $5 direct demand.

Note: Indirect demand still has a $3.40 eCPM as in the previous case, but the publisher could realize an overall lift of 10% in this example.

Conclusion
The ecosystem around native formats is evolving very fast. It is a wonderful time to be a publisher: Advertisers want to buy direct from publishers and the number of native networks (backfill partners) are growing.  Publishers should maximize revenue by executing strategies to roll out an ad stack which helps them integrate the first party ad serving with programmatic for these premium ad experiences. And it’s going to be big!

Satish Polisetti is cofounder of AdsNative. He previously worked at mobile advertising startups Amobee and MdotM and received a Mayfield Fund fellowship in 2010.