Getting the Most Out of Pay for Performance Advertising (try to say it 5 times, fast)
Online marketers frustrated with plummeting click-through-rates are flocking to pay-for-performance deals with websites and ad networks. To migrate away from CPM, paying per thousand impressions for ads served, to CPC, where you pay only for clicks received, and even to CPA, paying only when a customer takes a certain action–this sounds like a no-lose bonanza for marketers.
The opportunities for performance-based deals continue to grow, as banner inventory expands and supply puts steady downward pressure on CPM rates. Desperate websites are increasingly willing to share, or even take on the entire risk by offering deals unheard of in the glory days of banner ad sales, a mere year ago. These new arrangements include CPC and CPA, as well as combo deals known as “hybrids.” Forrester estimates that 83% of media buys will have some performance component by 2003.
Karen Fegarty, vice president of sales and marketing at MailWorkZ in Nova Scotia, uses a mix of eight different types of pay-for-performance deals. “We still do some CPM, but performance-based advertising is now 60% of our spending,” she says.
But the bonanza has its costs. Performance-based media buying is hard work, and needs careful planning to support a growing business. Saul Federman, president of the ad network BMCMedia, commented, “This stuff takes a lot more time and effort than CPM buying. You can’t just blow it out and buy wide with a single media plan. You have to negotiate, and track, and fine tune.”
When the risk shifts in the ad equation between the marketer and the medium, things get complicated. “Everyone wants to sell on CPM and buy on CPA,” says John Ardis, vice president of marketing at ValueClick. “You can’t sustain all one side or the other.” ValueClick, which claims to be the largest performance advertising network in the world, began as a cost-per-click network and has branched into other performance-based areas, like pay per lead and pay per sale.
The push-pull between advertiser and media owner reflects the key issue with pay for performance from the advertiser’s point of view: while you can get excellent per-action pricing, you frequently can’t get enough of it. As the pricing power has shifted to the advertiser, his power to reach and penetrate is vastly reduced.
Some advertisers find that you get what you pay for. “It’s critical that the message and offer be relevant to the product and the brand,” says Mike Keeler, CMO of Impower, which drives 100,000 actions a month through its TransAct network on a pay-per-action basis. “Soft offers work great in our network, but you have to be careful that you are attracting customers who will perform on the back end.”
Impower vice president Mark Zilling describes the negotiation process. “You have to define the allowable cost per order, or cost per action you can afford,” says Zilling. “The Internet allows maximal tracking and excellent flexibility to try different pricing deals. So you can make offers that are straight CPA or some minimal CPM with a per-action bonus, and the website can accept it, or test it, or reject it.”
“Some email list owners will negotiate a hybrid deal,” says Zilling. “Instead of paying a $200 CPM rate, you’ll do a relatively low CPM, say $40 to $50 per thousand, plus $30 for each new customer for a credit card offer. There’s no requirement that the owner take the offer for any given period. The Net allows flexibility in media placement that is unheard of in print.”
Both ValueClick and Impower were early leaders in the field of performance marketing, which originally focused on banner advertising but has now diversified into a variety of web media. The deals they offer are reminiscent of the traditional performance arrangements of the mail-order business, known as PI, or “per inquiry” deals. Frequently seen in perishable, relatively inflexible media like cable television and print magazines, PI deals are usually negotiated after some testing had proven the value of the offer and the rate of the response. Once that value is established, the publisher will run the ad in remnant space and be happy to earn at least something from an asset that would otherwise be unproductive.
And this goes to the crux of websites’ complaints about CPA deals. When the advertiser bears no media risk, then he has little incentive to make sure he’s using the best possible offer and creative elements in the message. But some view this as short-term thinking. “In the long run,” comments Federman, “if the site generates business for the advertiser, it also generates business for the website. So it behooves the advertiser to use the strongest possible ad, and the publisher to give it the best possible placement.”
Complaints and caveats aside, performance advertising has a substantial place to claim in a profitable marketing plan. Here follow some guidelines for how to get the most out of these new opportunities.
- Know your numbers. A clear understanding of the maximum profitable spend allowed per click, or per action, permits efficient buying. “We know it takes us 160 clicks to get a sale,” says MailWorkZ’s Fegarty. “So we can calculate our way into all kinds of creative pricing arrangements from there.”
- Use a mix of deals, whether straight performance or hybrid. “CPA is a good foundation, but you can’t always plan on it, ” says ValueClick’s Ardis. “So use as much CPA as you can get, and blend in CPC acquisition spending to achieve your growth.”
- Negotiate fairly. Once you know your allowable cost per click or cost per order, look for the win-win. “Media buyers who squeeze the publisher too hard risk killing the Golden Goose,” says Ardis.
- Explore all the media options. Performance deals can be found in all corners of Internet advertising today, if you dig a little. Impower’s TransAct network offers 30,000 “distribution points” for CPA, including banners, email and newsletter advertising. Email providers such as CyberGold are moving fast toward CPC and hybrid CPA deals. Affiliate networks like Commission Junction are CPA by their very nature: advertisers pay only when web visitors click through from the affiliate site location. GoTo allows advertisers to bid for higher rankings in key work search results, across 75% of the Internet, and pay for the traffic that clicks through. Z Media, recently bought by ValueClick, has an interesting angle: advertisers pay from 25 cents to a dollar per name for leads who click from participating sites’ registration forms.
- Match the deal to the marketing objective. CPA is great for testing new offers or new creatives inexpensively before rolling out in a broad CPM campaign. Or use CPC to build a qualified inquiry file, for later conversion by email. CPM is the best choice for an awareness campaign.
- Test, measure, and refine. Experiment with everything that looks reasonable, track the results and do more of what works. Take full advantage of the Web’s quick turnaround and trackability.
So what’s the outlook for performance-based advertising? Some think its current popularity is a fluke. “This is the softest ad market in years,” says Evan Sternschein, EVP of sales at the lotto portal iWon. “As the market gets stronger, you will see more CPM. CPA might be an element, but it is not the future of our business.”
But Patricia A. Mulvaney, partner at PriceWaterhouseCoopers’s media and entertainment practice, observes that marketers today are demanding accountability and results. “CPM is an efficiency buy, and pay for performance is about effectiveness,” she says.
Echoes Impower’s Zilling, “What’s going to happen in the future is that performance buying will continue to grow, it will just take different forms in different media. The last players to jump on board will be the majors, site owners like USAToday and ESPN, and portals like Yahoo. But even they will eventually see the value of offering advertisers flexibility and a variety of options.”
Acronym Alert
To save your sanity, here’s a handy guide to the most common acronyms and buzzwords littering the media buying landscape these days.
CPM: Cost per thousand. M, the Roman numeral, has been used for years as a convenient media unit.
CPC: Cost per click. Advertiser pays when a visitor clicks on the ad and is taken to his website or splash page. The advertiser attempts to sell him on the spot, or retain the relationship for later conversion.
CPA: Cost per action. Whatever the action desired by the advertiser, such as asking for a catalog, getting a free sample, filling out an order form, or signing up for a credit card. The advertiser pays for the number of actions generated.
CPL: Cost per lead. A variation on CPA, when the action desired is short of a sale.
CPS: Cost per sale. Another variation on CPA, when the action is a transaction. Also known as CPO, or cost per order.
PI: Per inquiry, a mail-order term for pay for performance, when the advertiser pays only for the leads, or sales, or inquiries, generated through the media.
Hybrid: A combo deal, where the advertiser pays a minimal CPM and supplements it with a bonus per action. Estimated by Forrester as comprising 23% of media spending today, and moving to 31% by 2003.