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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, notably 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-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 CPM 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 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.
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 touch-points - 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 re-market to them.
There are other important differentiators:
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.
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.
Various types of measurable action may be used in charging for performance-based advertising:
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.
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 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 (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 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. In theory, the call could only have been generated because of the print advertisement. In practice, there is the risk that an inadvertent third party will find a number from an advertisement and submit it to an online or printed directory, causing it to receive additional calls for which the advertiser must pay individually as "leads" or enquiries. Some of the received calls may be misdirected product support requests from existing clients or even enquiries from suppliers, which are not new revenue and should not be counted as new leads. Toll-free telephone numbers are also notoriously prone to misdials which a company must pay to receive - often because a little-used number is one digit away from a major airline, hotel chain, hire car firm, bank or national franchise operator.
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.
Other companies that offer straightforward pay for performance lead generation services, offer performance based pricing related to the quality or quantity of the lead.
There is the potential for fraud in performance-based advertising.
Since the user's actions are being measured, there are serious concerns 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.
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