The Current State of Ad-Pricing Models

Last week, I talked about one of the two biggest issues that came up at the third semiannual Media Buyers Summit. Sequential liability as outlined in the Guidelines for Standardized Terms and Conditions issued jointly by the Internet Advertising Bureau and the American Association of Advertising Agencies was debated with impassioned fervor, and we will still be sorting out the details for the time being.

The other cause cilhbre was the current state of pricing models and what, if anything, should be done about them.

(Another topic that came to the fore during this event was that of third-party ad serving and proof of performance, but it did not take center stage.)

Pricing Models

If any of you are actively buying or selling online media, you know what’s going on out there with inventory and how it is being priced. Buyers, taking full advantage of an unbalanced supply-and-demand equation, are looking for pay-for-performance advertising: cost-per-click (CPC), cost-per-action (CPA), cost-per-whatever. Advertisers and their agencies are asking for inventory at costs that plumb new depths, and — in some cases — they are getting it.

Needless to say, publishers are at their wits’ end regarding what to do about continuously falling costs per thousand impressions (CPMs) and ever-greater demands from buyers for some form of pay-for-performance advertising.

Just to give you an example of the conditions out there (if you don’t already know), John Durham, senior VP at Winstar Interactive, shared with the crowd an anecdote featuring a media buyer who wanted to do a geotargeted, demotargeted, cost-per-acquisition buy. As he put it, “Not only do you want to screw me, but you want to screw me, and then you want to screw me.” Aside from the fact that this elicited a roar from the crowd, it was a clear-cut illustration of buyer expectations and an expression of seller/publisher frustrations with them.

Supply Outstrips Demand

The economic reality is that there is far too much supply and not nearly enough demand. Buyers — desperate to find new ways to demonstrate the efficacy of the online medium to their clients by delivering on promises of accountability and return on investment made against bogus expectations of impulse-driven response rates and sales — are shopping hard for performance-based pricing models. Desperate for cash flow, many sites, in spite of themselves, are accepting these deals.

As I’ve said before, the supply-demand equation is out of whack. The only way to balance it is to either restrict supply or increase demand. The way that gets done when demand cannot be artificially promoted is with cost controls of some sort. If there is any demand at all, it will be found when price point is married to perceived value.

But what is going to happen if all online inventories are being sold on a pay-for-performance basis? Is the only real value of online advertising in the fact that an ad draws immediate response and drives a sale? Does it make sense to have CNN.com running per-inquiry-priced direct-response advertising?

No Panacea

I love pay-for-performance advertising, and I think that the advertising industry, both online and offline, is going to see more of it rather than less of it. But I do not think that it is appropriate in every instance, and I’ll tell you why.

1. Direct response is only one option.
Use of advertising as a sales channel is only one way to affect an advertiser’s bottom line. Regardless of our ability to use the Web and read causal relationships between our advertising and its effects, we cannot dismiss the fact that there is something to be said for advertising that does not result immediately in an action. Otherwise, everyone would be doing direct-response television, radio, and print, and you would never see Coca-Cola ads during a network program. When negotiating a buy, get solid confirmation from the client whether or not the immediate impact on “moving widgets,” for example, is the goal.
2. Media results are not predictable. Though I’m an advocate of pay-for-performance and still think it’s the right thing to do in some campaigns, I also realize that a buy may be subject to something akin to Heisenberg’s Uncertainty Principle. That is, we can guarantee the advertiser the CPA but not the volume. Or we can go big with CPC and CPM and better guarantee the volume but not CPA. An advertiser might want a demonstrable CPA projection, and it is possible to produce that. But one can sacrifice volume in the process.

3. Media results depend on campaign goals. You need to think about what the value of a placement is in its context. If you are using Web advertising space as an auxiliary sales channel, a commercial context certainly holds more value than, say, a sports-content context. In this respect, online advertising becomes a lot more like print. If you are trying to directly generate sales and/or a specific action, using trade print or the classifieds as your vehicle makes a lot of sense because you are in transactional contexts. But I don’t put ads next to congressional-hearing coverage in Time magazine if my goal is direct selling of the Pet Rock.

No doubt discussions about what is the best way to price online advertising will continue for a long while, but continuing to have open and impassioned but level debate on both sides of the aisle, like what was going on at the Media Buyers Summit, is going to move us far and fast toward balance and acceptance within the advertising industry at large.