Online Media's Odyssey: Performance compensation model

Jeremi Karnell, CMO & Founder | One to One Interactive
November 30, 2003

Beware of the Siren's Song

“The Sirens, they say, had maidens' features, but with wings and from thighs down they had the forms of birds. They played the flute, lyre, and sang. The isle where they lived was full of the mariners' bones they had led to destruction. It was foretold the Sirens would die when a ship passed them unharmed. Only Odysseus, bound to the mast heard their lovely song and lived, while his shipmate's whose ears were filled with wax sailed on.” (Adapted)

2002-2003 will be known as the glory years for online performance-based marketing opportunities. This is a result of two primary factors: the rise in popularity of paid search and a sagging economy in which few have spare ad budgets to waste.

Both have taken their toll on online publishers who have seen their traditional media compensation model, cost-per-thousand (CPM), drop from an average of $35 to $7 and demand for their traditional pricing model drop -22.5%[i] in just 2 years. In response to this changing environment many publishers have begun to allow their online inventory to be purchased on a qualified CPL/CPA basis, meaning that both the publisher and the advertiser jointly agree to the unique metric that defines a lead or an acquisition and the cost associated with each. This is how the publisher is compensated regardless of how many impressions are served, the click through rate, the creative performance, etc. Clearly, cost per qualified lead or acquisition is a step far beyond the pay- per-click options provided by Google and Overture in their paid search offerings.

Publisher sales reps, hungry for any revenue they can find in these lean times, wooed agencies and marketers alike with the Siren's song of performance compensation, and many followed willingly, adding online media to their portfolio of existing CPA tactics such as search, affiliate programs, and e-mail. However alluring these deals may seem, publishers and marketers alike should proceed with caution because there can be serious obstacles to navigating the CPA waters.

Back to the Future

Interestingly, it was the online media sector that led the way in popularizing the performance compensation model, even before affiliate and search tactics. Until 1996, almost all web-advertising was priced on the traditional CPM paradigm. In April of 1996, a new model was introduced to the marketplace when Yahoo! agreed to Proctor & Gamble's demand to pay only for the click-through on P&G banner ads and not on the basis of mere exposure. Enter the Cost per Action (CPA) model. At the time, many web publishers immediately denounced the Yahoo/P&G deal, stating that it put the onus to deliver on advertising on the publisher, without requiring the advertiser to share the cost. In addition, this new approach forced them into a compensation model that commoditized valuable inventory (regardless of whether it was sold or not) — cutting into their profit margins without providing any mechanism to value the business they were yielding for the advertising partner.

It was two months after the Yahoo/P&G deal, in July 1996, that Amazon.com launched its first affiliate program on the Internet, allowing individuals who drove people to its site to buy a book for a percentage commission of the sale. This provided the affiliate marketing industry with much needed visibility and credibility to move beyond the adult entertainment industry and into the hands of serious online marketers[ii]. Unlike the media industry though, the affiliate tactic quickly evolved beyond the pay-per-click model and began introducing compensation scenarios based on meaningful business activity (i.e., registrations, opt-ins, sales, etc.). More importantly, they also introduced program management applications that allowed marketers and affiliate participants embracing such tactics the ability to receive closed loop tracking, provide additional incentives to Tier 1 or big brand partners, and automate payment of commissions.

Two years later, on February 24th, 1998, GoTo.com (now Overture) was launched as the first search directory that enabled marketers to purchase placement within search results using a competitive bidding process. It was not until 2001 that Google introduced competitive technology. Although the paid search has not offered anything past the pay-per-click compensation structure, they have introduced to the market sophisticated bid management technology that allows the marketer to set the price of keyword terms and phrases, view their position ranking vs. the competition, and change these variables real-time. Additionally, a cottage industry of search marketing technology providers, like Inceptor and Quigo, have sprung up to provide tools to aggregate the management of paid search programs across all search engines and provide additional advanced functionality such as dynamic day-part and ROI bid management.

A wolf in sheep's clothing

Over the past 2 years, media publishers, portals and some ad networks, seeking to be players in the performance compensation boom, adopted elements from both affiliate and search models. In fact, many publishers/portals/networks evolved beyond the pay-per-click model that they originally introduced to the marketplace in 1996 and followed the affiliate path, agreeing to be compensated based off of quantifiable activity such as:

• Qualified database submissions (i.e. Name, Address, Phone, E-mail, Product/Service of Interest, etc.)
• Sign-ups for a free trial
• Site registrations
• Sale completions
• White paper or software downloads
• Call center activity
• E-mail or personal follow up inquiries

Somewhat more interesting, some publishers/portals/networks have decided to manage their advertising inventory in the same way search engines are managing their keyword inventory: by determining rotation prominence based on the agreed CPL/CPA $ amount, clicks, and conversion rates. Most have taken it one step further and put the primary onus of visibility not on the leading market price, but on their profit margin - an illusive and non-attainable data point to say the least.

However, unlike the affiliate and paid search opportunities, very few (if any) publishers/portals/networks offer the technology management solutions to make their programs scalable and sustainable. Without similar command and control interfaces, marketers are left navigating some serious obstacles in managing their media related CPL/CPA deals. For example:

• Hardly anyone offers web based dashboards that highlight available inventory, the competitive demand for such inventory, and ways to increase or decrease your bid for that inventory based on results. Advertisers are often left staring into a black box with no factual information to help them make intelligent decisions regarding where to best invest their marketing dollars.
• There are no alert mechanisms to let the advertiser know when their performance based advertising visibility is being eclipsed by a competitor who agreed to pay more money per lead/sale from the same inventory. When this happens, many will see their daily or weekly performance drop through the floor in the middle of a campaign. It is not until they call the media property do they find out that their program has taken a back seat to a higher bidder.
• There is no ability to leverage 3rd party ad serving statistics and post-click tracking, since it makes no sense to pay for an unknown amount of impressions (the currency of ad serving compensation) the media partner may run to garner the agreed upon results. This leaves many advertisers without valuable campaign information that they are used to seeing in their other interactive marketing activities, such as latent outcomes. One may deploy tracking technology, such as CentrPort, to overcome this. However, it does require them to have additional budget to pay for the license and the technology deployed before the start of their campaign.

Conclusion

The above points are just a few of the reasons that performance-based media can be a resource-intensive, and often manual, exercise. If managed aggressively, there is no doubt that such deals will yield tangible business results. However, there should be no illusion that what you may gain in perceived dollar efficiency for the media inventory will need to be re-invested in extensive, ongoing management of such deals. That is, until publishers/portals/networks who continue to offer these programs begin provide technology management solutions as well.

Some have already moved in this direction: Advertising.com has introduced a web-based management tool, similar to what paid search has to offer, for clients who tap them for performance-based deals across their media network. Likewise, it is logical to expect that Yahoo! will capitalize on its acquisition of Overture and extend the latter's bid management application to evolve how they offer media inventory on a CPL/CPA basis. Finally, you may expect companies like DART, AtlasDMT, and Inceptor to one day provide 3rd party performance management applications that cut across search, affiliate programs, and media.

One may speculate how many other properties will make the financial investment necessary to maintain offering media on a performance compensation basis. As the economy begins to rebound moving into 2004 such opportunities will come under intense pressure. As more marketing budgets become available, the simple law of supply and demand will continue to boost prices for performance opportunities upwards while conversion rates are unlikely to change. At this point, the cost may simply outweigh the benefits, and advertisers will seek other, less costly compensation options.

For marketers faced with this ever-changing and rocky landscape, avoid the Siren's song of a performance-based compensation plan only; instead, have a diversified portfolio of compensation structures that run the range of CPM, CPC, CPL, CPA, and sponsorship investments. This will provide you with the appropriate risk tolerance to weather those players who drop out, the adolescent stage of those players who will remain, and ongoing pressure from your competition.

[i] Internet Advertising Bureau/PriceWaterHouseCoopers (PWC), June 2003
[ii] The consensus of marketing folks and adult industry insiders is that Cybererotica was either the first or among the early innovators in affiliate marketing with a cost-per-click program.

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