Where’s the Risk? How CPA & CPM are Changing Marketplace Efficiency

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Online advertising is probably one of the few industries that divides the products and customer types over a pricing type such as CPA and CPM. It’s unlikely that when I purchase a car, groceries, or a Starbucks Grande Mocha that I have the option to pay on performance or upfront. Can you imagine telling the clerk at Starbucks, “Can I pay for that later only if I like it?” Our industry is unique in its ability to design pricing methods to accommodate the industry’s maturing process.

The CPA versus CPM debate is an old one and has been resolved mainly through a firm division of the industry into those that do it and those do not. As the industry is quickly maturing I think that we should take another look at how this pricing legacy is shaping and impacting our industry.

I had a small car accident about three years ago, thankfully no one was hurt, but it cost my insurance company a few dollars. After many years of steady and reliable monthly payments I thought that they would be happy to help, but in fact they raised my rates and proceeded to educate me about how I am an elevated risk and I need to pay more to offset their risk.

Apparently insurance companies are actually risk assessment and management organizations that gamble future returns based on past performance. The online advertising industry tends to mimic the insurance industry as advertisers move their financial risk to the publishers/networks by purchasing on CPA. Doing business is then based on the campaign performance and the advertiser’s history of performance reliability. If the campaign performs, everyone wins, if it doesn’t than mainly the publisher looses due to sunk media cost. To be clear, the publisher takes most of the risk in this model. With CPM, the advertiser pays a fixed cost for the media and if it performs, everyone wins, if it doesn’t than the advertiser has to absorb the sunk media cost.

The entire CPA versus CPM debate is really about the balance of leverage and risk between publishers and advertisers and the efficiencies of a real-time marketplace. When the market was very weak CPA (advertisers) thrived, and as the market boomed, CPM (publishers) was the dominant pricing metric. However, now that online advertising is booming more than ever you may notice that CPA is still booming and growing faster than ever. I think that the dynamics of this equation have shifted since the last boom and that CPA is succeeding because of a few important factors:

1. Inefficiencies: There’s still serious inefficiencies being discovered in the marketplace. The CPA based networks are reaching inventory that simply cannot attract the attention of CPM based networks due to size or ease of working. There’s billions of ad impressions each month that are not represented or poorly utilized to be found. CPA Networks tend to be self-service while CPM networks rarely are and very sensitive to performance cost.

4 COMMENTS

  1. There is a third alternative; cost per click (CPC). With this model the advertiser and publisher share the risk. PPC advertising is an efficient, mutually beneficial advertising format that gives both the advertiser and publisher an incentive to optimize the results that are derived from each click. The publisher, if it wants to attract multiple bids at a price that makes the model profitable , must deliver a targeted high quality audience and give some measure of performance guarantee to the advertiser. The advertiser, sets the price, but in order to meet its ROI must carefully manage bids, budgets and back-end conversions.

  2. Well it true that the CPC model will spread out the risk between the advertiser and the publisher. This model however by no mean perfects either.

    As we know click fraud has been prevalent in our industry, it is something we have to compromise with until better algorithms and technology can be used to filter these out. The current tools being used are still considered inadequate.

    Text ads CPC usually yield horrendous result for the publishers, and advertisers love it as it gives you an engage audience. But in reality publishers will eventually realized that ads like Adsense will yield lower than expected yield than the CPM deals they struck with some one else. So CPC advertisers are usually chasing for inventories.

  3. The reality is that there will never be better algorithms and technology to filter these out with more than 80% success. The problem can not be solved by technology as for each solution that is added there are millions of counter solutions invented to circumvent this.

    It is a Internet cultural aspect that will eventually find the middle ground in this controversy. The internet is yet an infant and so are the business models we have today.

    The fraud and abuse aspect touches all models and both CPM and CPA models are not excluded from explotation despite what many may think.

    This true driver of one model over another is how much of an understanding the industry as a whole has in regard to the strengths and weaknesses of each at any given moment.

    As there are few people that work with all of these models on a daily basis the trend is to believe that when one model appears to be a significant risk that perhaps the other is the solution to their problem. In the end they fail to realize it isn’t the model that is the key. The true key is to understanding all of them and knowing where and when each is applicable.

  4. The CPA model is still going to be for the spammers and the “shoot the monkey” banners. Networks are desperate for advertising since their quality has disappeared, so many are taking CPA because they can no longer sell to agencies.

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