Posted on January 8, 2008
Filed Under Marketing 2.0 |
Online advertising is a hot topic. The market has experienced rapid growth over the past several years as advertisers embraced the relatively young online medium as a way to reach consumers. New behemoths, like Google, have been created in the process and the promise of social networks and online video as new marketing platforms has created a flood of money into the consumer Internet space.
Despite all of the discussion and debate, however, I rarely see anyone take a step back to take a look at the big picture. What has the real impact of online advertising been for advertisers? Where is online advertising headed? So I figured that I’d have to start doing it on occasion.
In this post, I’ll look at the common pricing models used for online advertising, analyze their strengths and weaknesses and then will attempt to make some amazingly insightful comments that are probably useless.
CPM Advertising: It Doesn’t Work, But Advertisers Keep Buying
CPM advertising, where pricing is based on 1,000 impressions, has traditionally been the model of choice for display advertising deals online. It’s simple, however for most advertisers, it just doesn’t deliver results. Click-thru rates for an average campaign are typically nothing to write home about and while targeting capabilities have improved, the truth is that a significant number of Internet users just don’t click on ads.
I recently had dinner with a marketer for a major brand and we discussed CPM advertising. Some of her comments to me:
- Everybody in the industry knows that most CPM deals are money-losers.
- Advertisers keep spending because CPM deals are simply part of the “marketing mix.”
- Even with poor results, many advertisers justify continued CPM spend as part of their “branding” exercises.
The good news for online publishers is that CPM deals aren’t going to disappear. And with advertisers enthralled by the relatively new online video ad market, there’s a new place to put some of that CPM spend. The bad news, of course, is that resurgence of high CPMs that many publishers are commanding could easily collapse, just as they did when Bubble 1.0 popped.
CPC Advertising: Google and Fraudsters Are the Big Winners
The cost-per-click (CPC) advertising model was pioneered by GoTo.com, which later became Overture. The model is quite simple: advertisers pay each time their advertisement is clicked on. The value proposition is quite simple: while a marketer has no idea whether a CPM display ad deal will deliver clicks, the CPC model ensures that the marketer only pays for clicks. Once a click is received, it’s up to the marketer to convert.
By developing the world’s most popular CPC service, AdWords, Google has become a $230+ billion giant. For a time, many hailed CPC as a perfect solution and smaller advertisers, including mom-and-pop businesses, were able to leverage services like AdWords to access a much larger audience in a fashion that was economically viable. But competition has increased and advertisers with smaller budgets cannot afford to pay anywhere as much per click as large advertisers. Additionally, and perhaps more importantly, programs like AdSense, which enable publishers to display AdWords ads on their sites and share revenue with Google, have given rise to claims of widespread click fraud. While the extent of the click fraud is heavily debated, I personally think there’s a very good reason Google reportedly opted to let a “click fraud” extortionist off the hook.
The net result of the flaws that have become apparent in the CPC model is that some advertisers are deciding that CPC is not viable. A friend of mine runs a small ecommerce business that used to generate most of its revenues from customers delivered through CPC campaigns on AdWords. He has since cut his AdWords budget significantly and made the following comments to me when I asked him about this:
- He can no longer afford to compete on AdWords because the cost per click that his competitors are willing and able to spend is significantly higher than what he can afford to spend. While this may be due to the fact that he is a drop-shipper and has lower margins, he claims that the numbers just don’t work out - unless his competitors have exponentially higher conversions, there’s no way they can be turning a profit on an initial average sale.
- He suspects that around half of his clicks are fraudulent. While he didn’t elaborate on how he came to this conclusion, based on my own personal experience with several CPC services, I don’t find it hard to believe that some advertisers see a significant percentage of questionable clicks.
Although this is just one story, I’ve heard similar stories before and the general impression I get is that CPC has become less effective for many advertisers, especially smaller ones. Complaints about increasing costs and click fraud are real and while it would be unrealistic to expect that the CPC model is going to die anytime soon, these complaints should not be blown off. If a large number of smaller advertisers exit the market or reduce their CPC advertising budgets, it could present some real problems.
CPA: The Average Publisher’s Nightmare
The cost per action (CPA) model, in which a publisher is paid when a user referred by the publisher engages in some defined action of value to the advertiser, is the most appealing model to the advertiser, as the publisher is paid only when the advertiser achieves a desired outcome. For our purposes, we’ll consider affiliate programs and revenue sharing relationships to fall under the CPA model.
While there are strong CPA niches out there, for the most part, “top” publishers (major portals, content destinations, etc.) rarely offer CPA pricing unless it is part of a more integrated partnership.
The Advertiser-Publisher Conflict: A Threat to Online Advertising’s Long-Term Success
At the highest level, what is obvious to me is that online advertising has inherent strengths and weaknesses, just like any other advertising medium. There is no panacea for advertisers and there likely never will be, regardless of how much money is invested in inventing better “fly traps.”
I believe the biggest threat to the continued success and growth of the online advertising business is the publishers themselves. It’s my opinion that the average publisher has little to no interest in going the extra mile to ensure that advertisers achieve optimal results. When the market is hot and advertisers are competing fiercely for a finite number of eyeballs, there’s little incentive for publishers to do anything other than deliver access to an audience and cash the checks. This can be seen in the attitudes exhibited by people like Duncan Riley, who like to focus on all the money flowing into the online advertising space but rarely ever discuss just what advertisers are getting in return for their money. In other words, there are a lot of takers, but fewer givers.
The advertiser-publisher conflict arises because the pricing model that is most advantageous to each party is different. The average publisher loves a CPM deal while the average advertiser would most like a CPA deal. The logic is quite simple:
- With a CPM deal, the publisher gets paid for delivering eyeballs. Nothing more, nothing less. The burden falls on the advertiser to effectively convert those eyeballs. If the advertiser can’t do that, the publisher can simply turn around and say “It’s not our fault that your creative sucks” or “If you had a decent product to sell, maybe people would buy from you.”
- With a CPA deal, the publisher gets paid when he delivers tangible results for the advertiser. The publisher assumes a considerable amount of risk with the CPA deal structure because there is no money until there are results. If the publisher can’t deliver results, the marketer can say “It appears that the quality of your audience and your ability to drive business for us is not as high as you claimed.”
Of course, pricing models are somewhat irrelevant in the final analysis. Advertisers can track conversions and use them to determine an effective CPA for CPM deals. And publishers can do the same to determine an effective CPM for CPA deals. But at the end of the day, the fact that most top publishers squirm at the thought of CPA deals reveals that there’s a huge rift between the perceived interests of publishers and advertisers. Where there should be partnership, there is conflict.
I would encourage any reader who is skeptical of an advertiser-publisher conflict to email a top publisher with an offer for a CPA deal. Unless the publisher has an affiliate program focus (which most top publishers don’t), it’s unlikely that a CPA deal will be met with enthusiasm as opposed to a CPM rate card.
The Solution: Finding a Middle Ground
In theory, the CPC model serves as a sort of middle ground between the CPM and CPA models, and while I don’t anticipate the death of CPC anytime soon, the reality is that its flaws are becoming more apparent and it’s clear that it’s not quite the middle ground it appears to be on paper. CPA works for some, but it is highly unlikely that this will ever become a model that appeals to most publishers.
A real and tangible middle ground will be required if online advertising is to fulfill its full potential. While I may be biased in saying this, I do believe that much of the burden falls on online publishers to find this middle ground. They are, after all, the experts of the medium.
So what can online publishers do? Two simple things:
- Stop BSing. While the debate over website audience measurement is complex enough to warrant a separate post, I feel comfortable saying that quite a few publishers exaggerate the size and demographic qualities of their audiences and not all of this exaggeration is accidental. Far too many publishers are interested solely in getting advertisers to buy campaigns.
- Act like a partner. I’m a firm believer in the power of partnership. In every deal, the interests of all parties involved should be aligned. When the needs or desires of one party are met at the expense of another party’s interests, the seeds of a dysfunctional relationship have been sown. When it comes to online advertising, publisher engagement with an advertiser shouldn’t decrease after a check has been cashed. A publisher knows its audience best and should have some knowledge acquired over time that hints at how advertisers can best deliver an effective message to that audience. There’s no reason not to use this to assist advertisers. Going the extra mile makes sense: if an advertiser runs the same campaign on two properties, both of which deliver less-than-desired results, but one publisher went out of its way to attempt to improve them while the other did nothing, which publisher do you think is going to get second chances?
Obviously, advertisers have to have realistic expectations. All audiences aren’t created equally and the level of “partnership” that a marketer receives is likely to be higher on a “premium” deal as opposed to a “run of network” deal, but I think most advertisers know that.
If I was looking at an individual online advertising deal the same way that I would look at a business partnership, I would probably look to align the interests of both parties using a hybrid pricing model under which publishers are guaranteed a lower CPM but have the opportunity to make up for that because a CPA component is included. A pricing model of this nature would satisfy the needs of both parties: the publisher does not risk providing access to his audience for free while the marketer does not risk wasting money for access to an audience whose quality was oversold by the publisher. While I doubt that this type of model will be popularized anytime soon, in my opinion it would have the potential to alleviate this publisher-marketer dilemma.
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