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Why do performance marketers exist?

Written on
May 27, 2009 
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DM Confidential  |
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Why do performance marketers exist?

performance_marketing_works_small.jpgDM CONFIDENTIAL — So often we talk about our industry as though our existence makes complete sense, as though we have some inalienable right and unspoken reason for being.

The truth is that for many of us, we found ourselves operating in a particular segment without much consideration for what factors shaped our environment and why it even exists. Intellectually at some level we might understand some of the macro trends, but more often that not those same trends play such a minor role in our day to day actions that we have little reason to think about them.

Think of a canyon shaped by the flow of a river whose work took tens of thousands of years but on a micro level, we only see a canyon and a river. That river may have formed the canyon, but it’s too inconsequential a role on a daily, weekly, or even generational basis to give it much thought. That fact doesn’t diminish the importance and certainly the intellectual benefits from having a better grasp of the forces that shape our environment, when for instance the factors that shape an environment occur over the span of years instead of millennia.

We operate in a world that consists primarily of three constituents. Advertisers, Ad Inventory, and Eyeballs. Advertisers, we must assume, want to spend money effectively (at least at some level). They each want to pay for results, although the definition of result differs.

For some it means simply hitting a certain audience, whereas for others it has a very specific acquisition component, with the origins of our world coming from the fact that a dichotomy exists between how they want to pay (e.g., for an acquisition) and how they can pay (e.g., per click).

Websites can make money from ads, as the vast majority do, or they can make money from users through some form of direct transaction, i.e. the user pays them versus completing a transaction due to the influence of an ad. For those relying on ads, the more eyeballs they have, the more money they generally make. Of paramount importance, the average eyeball who visits a site and has the potential to interact with an ad isn’t all that savvy and can be relatively easily influenced.

This is what our ecosystem would look like in its early days – a handful of advertisers and a handful of publishers, operating in a world of transparency where advertisers have the information they need to decide where to place their money.

As we know, reality looks a lot different. Instead of a handful of advertisers and a handful of publishers, we today have millions of each, with opacity between the two growing by the day. Each side only sees a fraction of the total landscape, and advertisers especially face increasingly difficult choices about how to spend their money.

In the simple world, a middle man adds little value. They are seen as a gatekeeper to parties that have no reason not to know about the other. In today’s reality, the two sides need help connecting in order for each to achieve their goals. For advertisers, that means finding and/or accessing placements they might not know about on their own. For inventory owners, it means greater monetization and often lowered operational costs. For advertisers and publishers, aggregators make this possible.

Aggregators provide advertisers not just access but a single point of entry and often economies of scale; and they can act as an instant revenue source for publishers, allowing them to deploy time and capital towards other activities without giving up substantial margin.

Aggregators come in all sizes and shapes – display ad networks, contextual networks, cpa networks, affiliate networks, etc. – specializing more often than not in a form of inventory, pricing model, or targeting methodology. They can start as stand-alone companies, or as we have seen with one of the largest aggregators, they can begin as a publisher and then start to focus on third-party inventory (Google’s AdSense).

Occasionally, an aggregator will begin life as an advertiser, buying so effectively for themselves that they begin to buy inventory for many (CPX Interactive). Despite the gains in efficiency from aggregations, big pockets of inventory go under-monetized. One of the main reasons comes back to the fact that many advertisers want to buy media one way but don’t have the options too; or they might want to but don’t want to take the risk. In our world, we call this form of risk aggregation arbitrage.

The above mismatch in risk between advertisers and publishers is at the heart of the performance marketing world. An advertiser paying for an impression receives very little certainty about their ad spend, i.e. high risk. Whereas, for a publisher, being paid on an impression requires very little risk. Being paid on an acquisition meant taking a much greater risk because they had to rely on the advertiser’s ability to convert traffic.

Despite that risk mismatch, there have always been publishers willing to take that risk, and in the earlier days of Internet advertising, bridging that gap meant a technology solution. That technology solution enabling advertisers and publishers to transact on a performance level has become commonplace, and growth has come not from being able to do cost per acquisition but figuring out how to do it.

We again come back to aggregation and risk – and to arbitrage. We struggle today, and those who engage in performance marketing face a reputational problem because of the way we take risk. Going by the financial definition of arbitrage, it should involve little to no risk, or the gains for taking risk should vastly outweigh the potential loss from taking the risk. Not so today, and we’ve made increasingly riskier moves. The value proposition still exists, but it’s now a question of longevity.

Will we survive?

Courtesy of DM Confidential editor.

– Express your opinion, comment below.





Reader Comments.

I think we will not only survive, but we will thrive as an Industry. We see it with many of our partners. They see the value we provide on a site like Offers.com and are looking for ways we can work more closely together.

Posted by Steve Schaffer | 9:34 pm on May 28, 2009.

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