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.