Performance-based advertising
Encyclopedia
With performance-based advertising, the advertiser pays only for measurable results.
With other forms of advertising
they pay regardless of results.
Performance-based advertising is becoming more common with the spread of electronic media
, notably the Internet
, where it is possible to directly measure user actions that result from the advertisement. In fact, over half of all internet advertising is performance-based today.
CPM (Cost-per-Mille, or Cost-per-Thousand) Pricing Models charge advertisers for impressions - i.e. the number of times people view an advertisement. Display advertising is commonly sold on a Cost-per-Lead pricing model. The problem with CPM advertising is that advertisers are charged even if the target audience does not click on the advertisement.
CPC (Cost-per-Click) advertising overcomes this problem by charging advertisers only when the consumer clicks on the advertisement. However, due to increased competition, search keywords have become very expensive. A 2007 Doubleclick Performics Search trends Report shows that there were nearly six times as many keywords with a cost per click (CPC) of more than $1 in January of 2007 than the prior year. The cost per keyword increased by 33% and the cost per click rose by as much as 55%.
In recent times, there has been a rapid increase in online lead generation - banner and direct response advertising that works off a CPL pricing model. In a Cost-per-Lead pricing model, advertisers pay only for qualified leads - irrespective of the clicks or impressions that went into generating the lead. CPL advertising is also commonly referred to as online lead generation.
Cost per Lead
(CPL) pricing models are the most advertiser friendly. A recent IBM research study found that two-thirds of senior marketers expect 20 percent of ad revenue to move away from impression-based sales, in favor of action-based models within three years. CPL models allow advertisers to pay only for qualified leads as opposed to clicks or impressions and are at the pinnacle of the online advertising ROI hierarchy.
In CPA advertising, advertisers pay for a specific action such as a credit card transaction (also called CPO, Cost-Per-Order).
Advertisers need to be careful when choosing between CPL and CPA pricing models.
In CPL campaigns, advertisers pay for an interested lead - i.e. the contact information of a person interested in the advertiser's product or service. CPL campaigns are suitable for brand marketers and direct response marketers looking to engage consumers at multiple touchpoints - by building a newsletter list, community site, reward program or member acquisition program.
In CPA campaigns, the advertiser typically pays for a completed sale involving a credit card transaction. CPA is all about 'now' -- it focuses on driving consumers to buy at that exact moment. If a visitor to the website doesn't buy anything, there's no easy way to remarket to them.
There are other important differentiators:
1. CPL campaigns are advertiser-centric. The advertiser remains in control of their brand, selecting trusted and contextually relevant publishers to run their offers.On the other hand, CPA and affiliate marketing campaigns are publisher-centric. Advertisers cede control over where their brand will appear, as publishers browse offers and pick which to run on their websites. Advertisers generally do not know where their offer is running.
2. CPL campaigns are usually high volume and light-weight.In CPL campaigns, consumers submit only basic contact information. The transaction can be as simple as an email address. On the other hand, CPA campaigns are usually low volume and complex. Typically, consumer has to submit credit card and other detailed information.
CPL advertising is more appropriate for advertisers looking to deploy acquisition campaigns by re-marketing to end consumers through e-newsletters, community sites, reward programs, loyalty programs and other engagement vehicles.
With performance-based advertising plans, they avoid the risk of paying large amounts for advertisements that are ineffective. They pay only for results.
The advertising agency, distributor or publisher assumes the risk, and is therefore motivated to ensure that
the advertisement is well-targeted, making best use of the available inventory of advertising space.
Electronic media publishers may choose advertisements based on location, time of day, day of week, demographics and performance history,
ensuring that they maximize revenue earned from each advertising slot.
The close attention to targeting is intended to minimize the number of irrelevant advertisements presented to consumers.
They see advertisements for products and services that are likely to interest them.
Although consumers often state that advertisements are irritating, in many situations they find the advertisement useful if they are relevant.
Some Internet sites are markets, bringing together buyers and sellers. eBay
is a prominent example of a market operating on an auction basis. Other market sites let the vendors set their price. In either model, the market mediates sales and takes a commission - a defined percentage of the sale value. The market is motivated to give a more prominent position to vendors who achieve high sales value. Markets may be seen as a form of performance-based advertising.
The use of mobile coupons also enables a whole new world of metrics within identifying campaign effect. There are several providers of mobile coupon technology that makes it possible to provide unique coupons or barcodes to each individual person and at the same time identify the person downloading it. This makes it possible to follow these individuals during the whole process from downloading until when and where the coupons are redeemed.
The mobile telephone is increasingly used as a web browsing device, and can support both pay-per-click and pay-per-call plans.
Coupons delivered to the mobile handset can be used to link advertising direct to sales.
As consumers start to use their mobile handset as an electronic payment device, it may become practical to establish direct linkage between advertising and purchases.
The linkage may be indirect.
A consumer may use their mobile phone to scan a barcode on an outdoor advertisement.
This loads the advertiser's mobile site onto the phone.
When the consumer shortly afterwards goes to the advertiser's store and uses their phone to make a purchase, the linkage can be inferred.
Directory assistance
providers are starting to introduce advertising, particularly with "Free DA" services such as the Jingle Networks 1-800-FREE-411, the AT&T
1-800-YELLOWPAGES and the Google
1-800-GOOG-411.
The advertiser pays when a caller listens to their advertisement, the equivalent of Internet CPM advertising, when they ask for additional information, or when they place a call.
IPTV
promises to eventually combine features of cable television
and the Internet.
Viewers may see advertisements in a sidebar that are relevant to the show they are watching.
They may click on an advertisement to obtain more details, and this action can be measured and used to charge the advertiser.
It is even possible to directly measure the performance of print advertising.
The publisher prints a special telephone number in the advertisement, used nowhere else.
When a consumer places a call to that number, the call event is recorded and the call is routed to the regular number.
The call could only have been generated because of the print advertisement.
The advertiser states how much they are willing to pay for a user action, and the publisher provides feedback on how much other advertisers have offered. The actual amount paid may be lower than the amount bid, for example 1 cent more than the next highest bidder.
A "bidding" plan does not guarantee that the highest bidder will always be presented in the most prominent advertising slot, or will gain the most user actions.
The publisher will want to earn the maximum revenue from each advertising slot, and may decide (based on actual results) that a lower bidder is likely to
bring more revenue than a higher bidder - they will pay less but be selected more often.
In a competitive market, with many advertisers and many publications, defined prices and bid-based prices are likely to converge on the generally accepted value of an advertising action. This presumably reflects the expected sale value and the profit that will result from the sale. An item like a hotel room or airplane seat that loses all value if not sold may be priced at a higher ratio of sale value than an item like a bag of sand or box of nails that will retain its value over time.
A number of companies provide products or services to help optimize the bidding process, including deciding which keywords the advertiser should bid on and which sites will give best performance.
Since the user's actions are being measured, there may be some concern of loss of privacy.
Performance-based advertising mechanisms induce firms to distort the prices of their goods (usually upwards) relative to prices that would maximize profits in settings where advertising is sold under established pay-per-impression methods. Upward price distortions reduce both consumer surplus and the joint publisher-advertiser profit, leading to a net reduction in social welfare. Dellarocas (2010) discusses a number of ways in which performance-based advertising mechanisms can be enhanced to restore efficient pricing.
With other forms of advertising
Advertising
Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
they pay regardless of results.
Performance-based advertising is becoming more common with the spread of electronic media
Electronic media
Electronic media are media that use electronics or electromechanical energy for the end-user to access the content. This is in contrast to static media , which today are most often created electronically, but don't require electronics to be accessed by the end-user in the printed form...
, notably the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
, where it is possible to directly measure user actions that result from the advertisement. In fact, over half of all internet advertising is performance-based today.
Pricing models
There are four common pricing models used in the online performance advertising market.CPM (Cost-per-Mille, or Cost-per-Thousand) Pricing Models charge advertisers for impressions - i.e. the number of times people view an advertisement. Display advertising is commonly sold on a Cost-per-Lead pricing model. The problem with CPM advertising is that advertisers are charged even if the target audience does not click on the advertisement.
CPC (Cost-per-Click) advertising overcomes this problem by charging advertisers only when the consumer clicks on the advertisement. However, due to increased competition, search keywords have become very expensive. A 2007 Doubleclick Performics Search trends Report shows that there were nearly six times as many keywords with a cost per click (CPC) of more than $1 in January of 2007 than the prior year. The cost per keyword increased by 33% and the cost per click rose by as much as 55%.
In recent times, there has been a rapid increase in online lead generation - banner and direct response advertising that works off a CPL pricing model. In a Cost-per-Lead pricing model, advertisers pay only for qualified leads - irrespective of the clicks or impressions that went into generating the lead. CPL advertising is also commonly referred to as online lead generation.
Cost per Lead
Cost per Lead
Cost Per Lead or CPL is an online advertising pricing model, where the advertiser pays for an explicit sign-up from an interested consumer interested in the advertiser offer....
(CPL) pricing models are the most advertiser friendly. A recent IBM research study found that two-thirds of senior marketers expect 20 percent of ad revenue to move away from impression-based sales, in favor of action-based models within three years. CPL models allow advertisers to pay only for qualified leads as opposed to clicks or impressions and are at the pinnacle of the online advertising ROI hierarchy.
In CPA advertising, advertisers pay for a specific action such as a credit card transaction (also called CPO, Cost-Per-Order).
Advertisers need to be careful when choosing between CPL and CPA pricing models.
In CPL campaigns, advertisers pay for an interested lead - i.e. the contact information of a person interested in the advertiser's product or service. CPL campaigns are suitable for brand marketers and direct response marketers looking to engage consumers at multiple touchpoints - by building a newsletter list, community site, reward program or member acquisition program.
In CPA campaigns, the advertiser typically pays for a completed sale involving a credit card transaction. CPA is all about 'now' -- it focuses on driving consumers to buy at that exact moment. If a visitor to the website doesn't buy anything, there's no easy way to remarket to them.
There are other important differentiators:
1. CPL campaigns are advertiser-centric. The advertiser remains in control of their brand, selecting trusted and contextually relevant publishers to run their offers.On the other hand, CPA and affiliate marketing campaigns are publisher-centric. Advertisers cede control over where their brand will appear, as publishers browse offers and pick which to run on their websites. Advertisers generally do not know where their offer is running.
2. CPL campaigns are usually high volume and light-weight.In CPL campaigns, consumers submit only basic contact information. The transaction can be as simple as an email address. On the other hand, CPA campaigns are usually low volume and complex. Typically, consumer has to submit credit card and other detailed information.
CPL advertising is more appropriate for advertisers looking to deploy acquisition campaigns by re-marketing to end consumers through e-newsletters, community sites, reward programs, loyalty programs and other engagement vehicles.
Economic benefits
Many advertisers have limited budgets and may not understand the most effective method of advertising.With performance-based advertising plans, they avoid the risk of paying large amounts for advertisements that are ineffective. They pay only for results.
The advertising agency, distributor or publisher assumes the risk, and is therefore motivated to ensure that
the advertisement is well-targeted, making best use of the available inventory of advertising space.
Electronic media publishers may choose advertisements based on location, time of day, day of week, demographics and performance history,
ensuring that they maximize revenue earned from each advertising slot.
The close attention to targeting is intended to minimize the number of irrelevant advertisements presented to consumers.
They see advertisements for products and services that are likely to interest them.
Although consumers often state that advertisements are irritating, in many situations they find the advertisement useful if they are relevant.
Metrics
Various types of measurable action may be used in charging for performance-based advertising:- Many Internet sites charge for advertising on a "CPM" (Cost per Thousand) or Cost per impressionCost Per ImpressionCost per impression, often abbreviated to CPI or CPM for Cost per thousand impressions, is a phrase often used in online advertising and marketing related to web traffic. It is used for measuring the worth and cost of a specific e-marketing campaign. This technique is applied with web banners,...
basis. That is, the advertiser pays only when a consumer sees their advertisement. Some would argue that this is not performance-based advertising since there is no measurement of the user response. - Internet sites often also offer advertising on a "PPC" (pay per clickPay per clickPay per click is an Internet advertising model used to direct traffic to websites, where advertisers pay the publisher when the ad is clicked. With search engines, advertisers typically bid on keyword phrases relevant to their target market...
) basis. GoogleGoogleGoogle Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
's AdWordsAdWordsGoogle AdWords is Google's main advertising product and main source of revenue. Google's total advertising revenues were USD$28 billion in 2010. AdWords offers pay-per-click advertising, cost-per-thousand advertising, and site-targeted advertising for text, banner, and rich-media ads. The AdWords...
product and equivalent products from Yahoo!Yahoo!Yahoo! Inc. is an American multinational internet corporation headquartered in Sunnyvale, California, United States. The company is perhaps best known for its web portal, search engine , Yahoo! Directory, Yahoo! Mail, Yahoo! News, Yahoo! Groups, Yahoo! Answers, advertising, online mapping ,...
, MicrosoftMicrosoftMicrosoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
and others support PPC advertising plans. - A small but growing number of sites are starting to offer plans on a "Pay per call" basis. The user can click a button to place a VoIP call, or to request a call from the advertiser. If the user requests a call, presumably they are highly likely to make a purchase.
- Finally, there is considerable research into methods of linking the user's actions to the eventual purchase: the ideal form of performance measurement.
Some Internet sites are markets, bringing together buyers and sellers. eBay
EBay
eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
is a prominent example of a market operating on an auction basis. Other market sites let the vendors set their price. In either model, the market mediates sales and takes a commission - a defined percentage of the sale value. The market is motivated to give a more prominent position to vendors who achieve high sales value. Markets may be seen as a form of performance-based advertising.
The use of mobile coupons also enables a whole new world of metrics within identifying campaign effect. There are several providers of mobile coupon technology that makes it possible to provide unique coupons or barcodes to each individual person and at the same time identify the person downloading it. This makes it possible to follow these individuals during the whole process from downloading until when and where the coupons are redeemed.
Media
Although the Internet introduced the concept of performance-based advertising, it is now spreading into other media.The mobile telephone is increasingly used as a web browsing device, and can support both pay-per-click and pay-per-call plans.
Coupons delivered to the mobile handset can be used to link advertising direct to sales.
As consumers start to use their mobile handset as an electronic payment device, it may become practical to establish direct linkage between advertising and purchases.
The linkage may be indirect.
A consumer may use their mobile phone to scan a barcode on an outdoor advertisement.
This loads the advertiser's mobile site onto the phone.
When the consumer shortly afterwards goes to the advertiser's store and uses their phone to make a purchase, the linkage can be inferred.
Directory assistance
Directory assistance
In telecommunications, directory assistance or directory enquiries is a phone service used to find out a specific telephone number and/or address of a residence, business, or government entity.-Technology:...
providers are starting to introduce advertising, particularly with "Free DA" services such as the Jingle Networks 1-800-FREE-411, the AT&T
AT&T
AT&T Inc. is an American multinational telecommunications corporation headquartered in Whitacre Tower, Dallas, Texas, United States. It is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services...
1-800-YELLOWPAGES and the Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
1-800-GOOG-411.
The advertiser pays when a caller listens to their advertisement, the equivalent of Internet CPM advertising, when they ask for additional information, or when they place a call.
IPTV
IPTV
Internet Protocol television is a system through which television services are delivered using the Internet protocol suite over a packet-switched network such as the Internet, instead of being delivered through traditional terrestrial, satellite signal, and cable television formats.IPTV services...
promises to eventually combine features of cable television
Cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...
and the Internet.
Viewers may see advertisements in a sidebar that are relevant to the show they are watching.
They may click on an advertisement to obtain more details, and this action can be measured and used to charge the advertiser.
It is even possible to directly measure the performance of print advertising.
The publisher prints a special telephone number in the advertisement, used nowhere else.
When a consumer places a call to that number, the call event is recorded and the call is routed to the regular number.
The call could only have been generated because of the print advertisement.
Pricing
A publisher may charge defined prices for performance-based advertising, so much per click or call, but it is common for prices to be set through some form of "bidding" or auction arrangement.The advertiser states how much they are willing to pay for a user action, and the publisher provides feedback on how much other advertisers have offered. The actual amount paid may be lower than the amount bid, for example 1 cent more than the next highest bidder.
A "bidding" plan does not guarantee that the highest bidder will always be presented in the most prominent advertising slot, or will gain the most user actions.
The publisher will want to earn the maximum revenue from each advertising slot, and may decide (based on actual results) that a lower bidder is likely to
bring more revenue than a higher bidder - they will pay less but be selected more often.
In a competitive market, with many advertisers and many publications, defined prices and bid-based prices are likely to converge on the generally accepted value of an advertising action. This presumably reflects the expected sale value and the profit that will result from the sale. An item like a hotel room or airplane seat that loses all value if not sold may be priced at a higher ratio of sale value than an item like a bag of sand or box of nails that will retain its value over time.
A number of companies provide products or services to help optimize the bidding process, including deciding which keywords the advertiser should bid on and which sites will give best performance.
Issues
There is the potential for fraud in performance-based advertising.- The publication may report excessive performance results, although a reputable publication would be unlikely to take the risk of being exposed by audit.
- A competitor may arrange for automatically generated clicks on an advertisement
Since the user's actions are being measured, there may be some concern of loss of privacy.
Performance-based advertising mechanisms induce firms to distort the prices of their goods (usually upwards) relative to prices that would maximize profits in settings where advertising is sold under established pay-per-impression methods. Upward price distortions reduce both consumer surplus and the joint publisher-advertiser profit, leading to a net reduction in social welfare. Dellarocas (2010) discusses a number of ways in which performance-based advertising mechanisms can be enhanced to restore efficient pricing.
See also
- AdvertisingAdvertisingAdvertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
- AdWordsAdWordsGoogle AdWords is Google's main advertising product and main source of revenue. Google's total advertising revenues were USD$28 billion in 2010. AdWords offers pay-per-click advertising, cost-per-thousand advertising, and site-targeted advertising for text, banner, and rich-media ads. The AdWords...
- Cost per actionCost Per ActionCost Per Action or CPA is an online advertising pricing model, where the advertiser pays for each specified action linked to the advertisement....
- Internet marketingInternet marketingInternet marketing, also known as digital marketing, web marketing, online marketing, search marketing or e-marketing, is referred to as the marketing of products or services over the Internet...
- Pay-per-callPay-per-callPay-per-call was originally a billing system generally known as "900" calls , where the phone company bills the caller a fee which is passed on to the owner of the number called...
- Pay per clickPay per clickPay per click is an Internet advertising model used to direct traffic to websites, where advertisers pay the publisher when the ad is clicked. With search engines, advertisers typically bid on keyword phrases relevant to their target market...