Fundamentals

Before we get too far ahead of ourselves, however, it might be good to take a quick time-out and go over some of the fundamentals that underlie online advertising deal structures.

There is a difference in which party – publisher or advertiser – bears more of the risk when deals are based on CPA (cost per action) versus CPM (cost per thousand). At the end of the day, putting an advertiser with a great product or service together with a publisher who’s got highly targeted and receptive readers is a win-win for both parties. But there are different approaches to financially aligning and balancing publisher risk with advertiser reward and vice versa.

With CPM models, cost is typically based on how tight the demographic is, the behavior of that demographic, and the available inventory. Unless we’re talking about a fairly large campaign or a campaign with a particularly motivated publisher, it’s typically the responsibility of the advertiser to provide appropriate creative (direct response, branding, or a blend). In a CPM deal, fees are paid regardless of the performance of the campaign; therefore the risk is primarily on the advertiser. Typically, this results in the lowest long-term effective cost for the advertiser. But that’s something that can only be determined if the advertiser has solid metrics with conversion data.

Often, if a publisher isn’t getting the conversions expected at a CPA level, they may fall back on a CPM or a CPC (cost per click) arrangement with the advertiser. They may be doing this for cash flow reasons, due to an unexpectedly long sales cycle with your product or service. But if you’re an advertiser who’s allocated a fairly reasonable budget for threshold marketing cost, be wary of doing a CPM or CPC deal instead of CPA. You may be advertising in the wrong venue or using the wrong medium or the publisher may not be providing proper placement, or maybe your product/service just isn’t critical to the audience at this point.

CPC models balance out the risk between publishers and advertisers. Depending on the CPC cost, it may slant in favor of one party or the other, but both are typically vested in making sure that the creative converts. For example, Google Adwords will make sure that the highest conversion/price combination moves up higher in the listings. CPC is a good way to start a balanced relationship while mitigating some risk; however, keep in mind that it is likely you will be limited to text links and traditional display ads (rich media or other). It is possible, with a minimum commitment, that the integration may be greater, but likely still not as far reaching as the CPA.

CPA models make the most sense when they’re related to a transaction (such as a sale, form completion, or other action.) The publisher takes on most of the financial risk because they believe they will get a larger upside on the back-end, leading to a higher effective CPM for their inventory. It’s not unusual to see effective $1000 CPM deals on the back of a CPA deal, sometimes unbeknownst to the advertiser.

Pure and simple, CPA is a math and risk game. Although it is in the interest of the publisher and the advertiser to build a long-term relationship that is mutually beneficial, it is important to understand how the system works so you know which approach is best for your target audience. You’ll also want to see that the metrics line up so both parties can thrive.

CPA deals are often the most creative and effective at reaching your target. Publishers are committed to integrating advertising messages in the most appropriate spots for conversion. They’re also offering more touch points (phone, email, and other types of support) to ensure that a transaction is completed. However, you must still know your metrics and the exact reach of the deal. For example, a publisher may expect a payout if users who register on their site first later convert with you. This can expose you to an unexpected payout in the future, even if the publisher did nothing more than just increase your brand awareness.

Further, it’s wise to thoroughly evaluate any agreements that include touch point controls to ensure that delivery is consistent with your intended brand experience. Remember, these customer experience touch points are associated with you.

Regardless of the level of risk and time required to set it up, a CPA is a partnership that can yield great results for both parties, especially if you don’t have a strong ecosystem or content strategy of your own (and thus can’t generate the kind of traffic you need organically.)

If you have an opportunity to do a CPA deal, don’t just jump at it thinking, “Hey, we are only paying for results.” Even if you have already done your homework and know your threshold cost per acquisition, you could still get stuck with a long term contract that forces you to pay $100 per customer, for example, when you have been getting them for $20 using a CPM approach across all of your networks. Equally costly, CPA does typically carry a higher opportunity cost, so you expend more internal resources, technology costs, and mind space to get a deal implemented.

Upfront risk is calculated into a CPA and CPC. It may not be the best option if you have stellar metrics. Once you have a solid set of performance metrics – from multiple publishers, ad types and creative – you should consider whether moving away from CPA or CPC toward a CPM approach that will get you the best ROI simply because when you take on the risk, you get the benefit.