Cost Per Action Pricing - Risks And Benefits

Last week’s column opened a series on ad pricing, discussing the traditional standard of CPM pricing. Anyone involved in this industry knows that things aren’t simple or clear-cut in the world of online ad prices, where sites and advertisers are experimenting with a wide range of creative pricing options.

True, standards exist. But they are by no means the rule. Today, we’ll start to explore a range of cost-per-action prices, and what they mean for both buyers and sellers.

We consider cost per action (CPA) pricing any formula that has advertisers paying not for viewership, but only for those viewers who do something upon seeing an ad. CPA pricing can range from cost-per-click to cost for registration forms filled out, contests entered, questionnaires answered, or cost per ultimate product purchase. And this includes lots of other variables along a continuum of steps toward the sale.

Advertisers often favor such pricing strategies because they pay only for measurable results. The problem for publishers is that they carry all the risk – if a poorly designed or badly targeted ad draws low activity levels, the publisher gets no revenue for those impressions served.

It’s clear why anyone would rather pay only for results. But the rationale to offer such pricing is less clear to any supplier who recognizes that actual results are as dependent upon what the buyer brings to the transaction, as to what the seller supplies.

So when the product advertised is not compelling to the audience reached, is that the responsibility of the buyer or seller? What if the product is a great fit with the target audience, but the ad creative falls flat or fails to deliver the promise that will cause those viewers to react? The responsibility question would be easier to answer if there were some absolute and objective measure for creative approach. But of course the very nature of ad creative makes that impossible.

In general, site publishers who prize the inherent value of their audience prefer to be paid for making that audience available to a marketing message, without bearing the risk for whether that message is effective.

However, given the oversupply of some online ad inventory, there are publishers who would prefer CPM pricing. But they are forced by customer demand to consider CPA models. In those situations, how should a publisher think about the value of a marketing action?

To counter the risk, most publishers charge much more for CPA arrangements, with the price going up as the action gets more demanding (and moves the customer closer to the sale.) So cost-per-click is higher than cost-per- impression. The cost for a completed registration form is many times higher, and the revenue share or cost-per-sale model is considerably higher still.

What multiples make sense depends upon site performance, and the site’s visitors’ anticipated actions. The more a publisher knows about how regular visitors react to various calls to action, the better equipped they are to appropriately price CPA arrangements.

Next week: A look at the numbers that go into these complex and varied calculations.