Revenue Versus Profit: Why Running a CPA Network Is Hard

Inplace #2

DM CONFIDENTIAL – Earlier this week, we met with a long-time veteran of the performance-marketing space. Today, he runs a CPA network, although he is the first to point out that the network piece of the business is not the emphasis.

For most companies, the network is their business. It is what they promote, tout, and spend all their time and energy looking for ways to differentiate — not to mention spending equal if not greater efforts on monetization. The problem, none of this is easy, and as this CEO explained, the business has become less fun that it once was. While we wouldn’t call it sounding stressed, we couldn’t help but hear a slight undercurrent of melancholy when describing the world of CPA.

As to what makes the business today less “fun,” the takeaways included the following:

Slim Margins. This doesn’t come as any surprise for those who have operated in the network space any appreciable amount of time. Unless a company has an exclusive, competitive pressures force networks to aim high and pay out an enormous percentage of the revenue.

Any network goes through this, even Google, who pays out on average 77% of their revenues to publishers. There are many networks for whom an average payout of 77% would feel amazing as they average more like 87% and above. Even on exclusives, the payouts tend to creep up in order to make the offers competitive.

And, despite efforts to keep payments a secret, publishers talk, which only adds pressure to the payout. Only newer networks offering a solution that no one else does can get away with revenue shares like 60/40.

Traffic Quality. Any network needs traffic in order to work, but traffic without quality is recipe for short-term success and long-term disaster. Getting traffic that actually works has become one of the most difficult challenges, and not surprisingly has driven many to seek out alternate, less sustainable sources.

Were we to draw a graph plotting traffic and competition over time, you would see it going high and to the right. At the same time the amount of time a person has before being copied has gone down. This results in a smaller and smaller number of affiliates/publishers being successful. The rest make decisions not optimal for advertisers in their quest to still make some money.

Traffic Source Changes. Unlike a few years ago, there is a great degree of variability in traffic. Like pop stars, many of today’s affiliates are almost one-hit wonders. They don’t fall out of favor because of the populace’s changing tides; they fall out of favor because so often their skill set becomes either obsolete or the trick that propelled them to success becomes a loophole closed.

Even the very best will often face a setback — e.g., a Google rule change, a Facebook T&C revision, mail deliverability change, or even regulatory changes — and few find their way back once having slipped. In today’s world, it seems these changes happen more frequently and with greater severity.

Being a Bank. Money is what drives publishers, and it’s amazing to see how the media buying culture has influenced the CPA Network space. Why? As people buy media with their credit cards, they often hit their limits. They need money to pay off that card to continue running their ads. This has created a culture of Net 7 or in some cases publishers wanting to receive payments twice per week.

The advertisers don’t pay Net 7. They pay Net 15 or Net 30. Ask any network owner, and they’ll tell you they actually pay much later than that. Imagine having a publisher who needs $50k/month. Now, imagine having 10 of them. That’s $500,000 that a company needs to have sitting in reserves.

Offer Sustainability. It’s hard enough to find a good offer let alone one that stands the test of time. Just as publisher’s sources of traffic have become harder to rely upon, (even the stalwart email has been dragging), finding an offer that can last is just as hard, if not harder.

In the past, people have built their entire businesses based around one offer or one vertical. Focusing on that offer or vertical generated eight-figure returns, but unlike an agency that might win a big brand’s budget and have a source of revenue for years, that doesn’t happen here. One tweak on the traffic side can result in an entire offer or channel of offers going away.

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