Shahar Solomianik

Hard Times

The economy is bad. The advertising market is slowing and ad rates are deteriorating . It seems like hard times are upon us. Are they? Maybe. Or maybe it is simply time for innovation.

As far as the online advertising market goes, we must remember that though the market has its own organic growth – which may have slowed down – online advertising is still a part of the whole advertising market. As such, it can generate growth simply by gaining market share over other advertising platforms.

The short nature of human memory makes us forget that online advertising’s ability to gain market share is exactly what drove the industry to its current size in the first place. Online Advertising gained market share over other advertising methods during bad economic times simply due to its ability to demonstrate better measurement and performance. The current slowdown, in my opinion, is a sign of a lack of innovation. This lack of innovation is what stops Online Advertising from growing even further.

Hey, maybe we should embrace the current crisis as a motivator for innovation. What kind of innovation? CPA, if you ask me.  And here’s why:

CPM

Let’s begin with a look at the history of online advertising. CPM was the first and most simple pricing model for online advertising. It was a copycat of the traditional offline advertising CPM model, common in TV, printed media, billboards et al. All offline advertising methods price their inventory according to a quality variable (length of the TV ad, square inches of the newspaper ad, location of the billboard) multiplied by the anticipated number of eyeballs it will reach.

And so it was the same thing on the web – only that the web had two advantages over traditional offline CPM. Eyeballs were measured in a more precise way – looking at webserver logs to count an advertisment’s exposures  is much more accurate than counting the number of cars going through an intersection at the rush time to assume the daily averages for billboard advertising.

The second advantage online CPM introduced was accurate counting for clicks. For the first time, advertisers could measure engagement through feedback from the target audience. On offline media this kind of data was only achievable using expensive market surveys with questionable results.

Online CPM was one thing that drove the online advertising market to grow. Advertisers eventually realized that they should spend their CPM dollars where they have better accuracy and engagement measurement.

But that wasn’t all.

CPC

The real thing that pushed the market forward was the development of performance advertising. Introduced by Overture in 1998 and perfected by Google a few years later, CPC was something completely different.

For the first time, advertisers could pay just for engagement. Even better, for the first time, advertisers shared the burden of goal achievement with the publisher. Gone were the days of a publisher just allocating the ad space and then forgetting about it. With CPC, publishers were motivated to increase their audience engagement for advertisers. They could change the locations of ads, their appearances, help increase their relevancy by providing keywords and so on. The more the publishers made an effort, the more they earned. A unique cooperation model was born.

Very quickly advertisers realized that CPC helps them achieve their goals. Whether it was sales, sign ups or leads, CPC took them one step closer to success. They could lower their investment in converting views to clicks – that was left for the motivated publishers – and instead concentrate on converting clicks to goals. Performance advertising was born.

More than CPM, CPC significantly drove advertisers to allocate a portion of their budget to online advertising. Additionally, Google’s method enabled small advertisers to join the game. With TV, you couldn’t even think about advertising if you had less than few thousand dollars. On Google, however, you could advertise your product with as little as 5 cents.

Of course CPC has its own problems. First and foremost is click fraud. Second, though it gets advertisers closer to their goals and helps them spend more effectively, it doesn’t bring them directly to achieving their goals the way CPA does.

CPA

CPA dates back to the same time as CPM, 1994. Thanks to Amazon, CPA gained a reputation as an essential part of the company’s growth.

CPA is the best pricing model for advertisers. It provides certainty regarding the future ROI of their whole campaign. It lessens the number of variables that are part of the calculations when determining ROI. When advertisers buy advertising using CPA, they know exactly how what they will recieve for each dollar spent. When they set their CPA rates, they are actually determining their own margins – as simple as that.

CPA is Not Scalable

However, Google and its CPC concept has taken the lead.  Not because it was a more effective method,  but because it was a scalable method. Compared to Google’s scalable CPC solution, CPA implementation was poor. Why?

The same advantage that CPA holds for advertisers turns out to be a disadvantage for publishers. While advertisers are spared from converting views to clicks to goals, the burden falls on the publishers. And as it turns out, the eCPM that publishers generate from CPA advertising is usually lower than that which is generated by CPM or CPC, hence its narrow adoption – only 7% of the market.

However, when CPA is used effectively, it generates a much higher eCPM than CPC and CPM because it is more effective by nature. When advertisers save $X thanks to CPA, a portion of this $X is passed on to the publisher’s eCPM. In fact, when used effectively CPA is such a powerful revenue generator that an entire mini industry of CPC to CPA arbitraging is prospering.

Yet, what prevents CPA from becoming a commodity for publishers is its scalability. Those who fully utilize it are only small publishers; the ones who can manually optimize their CPA campaigns, a tedious process. Optimizing Google AdSense CPC isn’t such a hassle – Google provides the contextual elements, and publishers can scale location and appearance easily. Scaling CPA in a way that both saves the manual optimization from the publishers and generates a high eCPM is not yet available.

CPA is the Future

We must develop an innovative way to scale CPA. Imagine the possibilities if such a tool existed. If publishers adopt it widely, it could drive more advertisers to use the CPA model. Consequentially, the whole market will act more effectively. Eventually, this will lead to advertisers re-allocating their offline budgets to online, and our industry will be saved!

Is there currently any innovation taking this route? Not really. Google experiments in it, and we could see something robust from them in the future. CPA networks don’t seem to be too innovative, and while there are few startups tackling this model, none of them seem to be revolutionary enough.

However, we are only at the start of tough times. The longer this downturn lasts, the better the chances are to see innovation, especially when the entrepreneurs realize that whoever succeeds to innovate in this market, might as well be the next Google.