How to succeed in advertising

There is likely to be a huge rise in performance-based advertising on the Internet, overtaking traditional impression-based ads.

4 min read
"If you're makin' me wait, if you're leadin' me on, I need to know."
--Tom Petty, "I Need to Know"

Over the next few years, there is likely to be a huge rise in performance-based advertising on the Internet. Historically, Internet ads have been sold on an impression-based metric known as "CPM." CPM, which stands for cost per thousand, represents how much an advertiser will pay to get in front of 1,000 sets of eyeballs. Some have suggested that price per click-through is a better model, but why stop there?

The proper model is performance-based advertising. In this world, an advertiser will pay only for an ad if and when the referral leads to a customer sale. Not impressions, not click-throughs, but honest-to-goodness revenues.

To be sure, this idea is not new. Businesses already accustomed to "origination fees" have flourished on the Web. This includes everything from long distance service and credit cards to mortgages. In each of these cases, content-based sites help customers identify a personally appropriate credit card or mortgage, and the matchmaker is then paid a certain bounty for finding the consumer. GetSmart is a great example of a business built around this concept. Affiliate programs are another form of success-based advertising. Amazon.com has no fewer than 35,000 affiliate sites that receive about 15 percent of the proceeds from book sales directed to Amazon.

Another form of success-based ad models are pay-for-performance banner ads. Internet advertising service DoubleClick believes in this market and has launched an interesting initiative known as DoubleClick Direct. However, new media in general have shied away from this market, with many executives dismissing the likelihood of adoption. I think the problem is that success-based programs are way too close to direct marketing on the marketing continuum. For most media types, comparing traditional impression-based advertising to direct marketing is like comparing Paris to Las Vegas. Performance-based advertising would seemingly jeopardize the essence of the experience.

Despite this snobbish reluctance, I see four reasons why success-based ads will flourish on the Web. The first and primary reason is that customers want it. With this model, the advertiser can assure that his or her ad programs are economically sound. You simply add the "bounty" fee to the cost of goods sold and you can predict the margin on each sale.

This is simply not the case with traditional advertising. The model shifts the burden of evaluating the quality of each ad program to the content company. If an ad doesn't have good responsiveness, the seller loses nothing, although the content company has used up inventory. Therefore, it is up to the content company to determine exactly which ads are likely to produce results. This shift of responsibility is quite palatable to the advertisers, and let us not forget the adage: The customer is always right.

The second reason to believe in this emergence can be found in the evolution of the last media revolution--cable television. If you watch one of the less popular shows on cable you will begIn to notice an overwhelming amount of 1-800 ads. This is because these programs have excess inventory, and the best way to maximize the revenue is success-based ad programs. Want a Topsy Tail? Need a citrus slicer? Want to add Super Hits of the '70s to your music collection? Ever notice the plethora of 1-800 ads on the financial news network CNBC? To highlight the issue of ad choice responsibility, have you noticed how often CNBC plugs Evita Nelson's MoneyLetter? That thing must be selling like hotcakes!

The third reason these programs will flourish is proliferation of unsold ad space on the Internet. In its most recent quarter, Internet bellwether Yahoo reported record revenues and earnings. (See related story) Interestingly enough, page views grew faster than revenues. This results in lower and lower average revenue per page view, which is also known as the "effective CPM." Internet advertising continues to grow at a healthy rate. However, and an increasing number of pages remain unused with respect to advertising.

Some suggest that this inventory glut will lead to price erosion. I think that there is another cure in performance-based advertising. What better way to bring economic equilibrium to the ad market than to fill the marginal page view with a performance-based ad?

One unique aspect of success-based advertising is the opportunity for marketers and financiers to conduct a more thorough quantitative analysis. How much should you pay for a referenced customer? You might think this is an easy question. Simply treat the bounty fee as an outsourced marketing expense. In this case, you would be willing to pay the same percentage as your sales and marketing expense ratio. If you normally expect to spend 12 percent of sales on marketing, then you would be willing to pay a 12 percent "sales charge" to anyone who brings you a guaranteed sale. However, life on the Internet is not this simple, and many retailers are willing to pay much more than this for a lead.