Performance-based advertising , also known as pay for performance advertising , is a form of advertising in which the purchaser pays only when there are measurable results. Performance-based advertising is becoming more common with the spread of electronic media , especially the Internet , where it is possible to measure user actions resulting from advertisement.
There are four common pricing models used in the online performance advertising market.
CPM (cost-per-thousand, or cost-per-thousand) price models. Display advertising is commonly sold on a CPM pricing model. The problem with CPM advertising is the subject of advertising.
CPC (cost-per-click) advertising overcomes this problem. 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 2007 than the prior year. The cost per keyword was 55% and 55% respectively.
In recent times, it has been a short increase in the 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 [ citation needed ] found that two-thirds of senior marketers expect 20 percent of ad revenue to move away from print-based sales, in favor of action-based models within three years. CPL models allow advertisers to pay only for qualified leads.
In CPA advertising , it is 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 – ie the contact information of a person interested in the advertiser’s product or service. CPL campaigns are suitable for marketers and direct response marketers looking for customers at multiple touch-points – by building a newsletter , community site, reward program or member acquisition program.
In CPA campaigns, the advertiser typically pays for a transaction involving a credit card transaction. CPA is all about ‘now’ – it focuses on driving consumers to buy at that exact moment. Do not buy anything, there is no easy way to re-market to them.
There are other important differentiators:
- CPL campaigns are advertiser-centric. The advertiser remains in control of their brand, On the other hand, CPA and affiliate marketing campaigns are publisher-centric. Advertisers are looking to see where their brand will appear. Advertisers do not know where their offer is running.
- 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 for campaigns by means of e-newsletters, community sites, reward programs, loyalty programs and other engagement vehicles.
Many advertisers have limited budgets and can not understand the most effective method of advertising. With performance-based advertising plans, they avoid the risk of paying large amounts for which they 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 can choose from a number of different types of advertising, based on time, day of week, demographics and performance history.
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. Despite the fact that they are in the position of being irritating, they are in the position of being useful.
Various types of measurable action may be used in the calculation of performance-based advertising:
- Many Internet sites charge for advertising on a CPM (cost per thousand) or cost per print basis. That is, the advertiser country only when a consumer sees their advertisement. Some would argue that this is not performance-based advertising.
- Internet sites also offer advertising on a “PPC” ( pay per click ) basis. Google ‘s AdWords product and equivalent products from Millennial Media , Yahoo! , Microsoft 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 is a prominent example of a market operating on an auction basis. Other market sites let the vendors set their price. In the model, the market mediates sales and takes a commission – a definite percentage of the sale value. The market is motivated to give a more prominent position to sellers who achieve high sales value. Markets can be seen as a form of performance-based advertising.
The use of mobile coupons also allows a whole new world of metrics within the field of recognition. There are several providers of mobile coupon technology that makes it possible to provide unique coupons or barcodes to each other. This makes it possible to follow these issues when the coupons are redeemed.
Although the Internet is introducing 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 directly to sales. As consumers start to use their mobile handset as an electronic payment device, it may become practical to establish a direct relationship between advertising and purchases. The linkage may be indirect. A consumer may use their phone to scan a barcode on an outdoor advertisement. This is the advertiser’s mobile site on the phone. When the consumer goes after the advertiser, the linkage can be inferred.
Directory assistance providers are starting to advertise, especially with “Free DA” services such as the Jingle Networks 1-800-FREE-411 , the AT & T 1-800-YELLOWPAGES and the (now-defunct) 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 can see in the back of the house they are watching. They can click on an advertisement to get 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. Advertisement advertisement, used nowhere else. When a consumer places a call to that number, the call is recorded and the call is routed to the regular number. In theory, the call of the author. In practice, there is the risk that an inadvertent third party will cause it to be an advertisement and submit it to an online or printed directory. Some of the received calls may be misdirected from existing customers or even inquiries from suppliers, which are not new and should not be counted as new leads.Toll-free telephone numbers are also notoriously prone to misdemeanors, which have to be paid for – often because they are used by the national or international bank.
A publisher may charge prices for performance-based advertising, so much for 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 share price, and the publisher provides. The actual amount paid may be lower than the bid amount, 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 win the most user actions. The publisher will want to earn the maximum revenue from each of them, and may decide that they will pay less than that.
In a competitive market, with many advertisers and many publications, it is possible to converge the value of an advertising action. This presumably reflects the expected value and the result. An item like a hotel room where it can not be used at a higher price than a list of items that will retain its value over time.
A number of companies providing services that help to optimize the bidding process, including deciding which keywords should be used.
Other companies that offer straight-forward pay for performance or lead generation services.
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 be achieved by auditing.
- A competitor may arrange for automatically generated clicks on advertisement
Since the user’s actions are being measured, there are serious concerns of loss of privacy.
Performance-based advertising mechanisms to reduce the cost of their goods (usually upwards). 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.