The rise of performance-based advertising

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The future belongs to those who not only can develop content that attracts an audience, but who can frame that content to encourage the behavior advertisers want.

The web is constantly evolving, as we all know. It's a changing environment because people are in the process of migrating from traditional media to online. This migration will not be total -- people will still read books and watch TV -- but the emphasis is changing. Print and broadcast media will become alternatives to the new mainstream -- online.

We are passing significant markers in this migration right now. For example, people aged 17 to 25 now spend more time online than watching TV. I recently spoke to a friend whose son was starting university. He visited the student halls of residence and was surprised to see that none of the students had stereos (an essential of student life in his day) or TVs in their rooms. When he asked about this the students laughed at him -- why would they need those when they had computers and internet connections? To this younger generation the idea of a device that can only handle a single medium, and that isn't connected to the web, is laughably archaic.

It's clear that we are evolving new ways of participating in society, new ways of communicating, and new ways of disseminating information. A key dynamic in this process is the transition of the print and broadcast advertising community onto the web. As this occurs, new models of advertising become possible.

Henry Ford once said "I know only half of my advertising works. The problem is, I don't know which half."

The web solves this problem. The ability to record people's behavior online means advertising can be assessed in terms of the behavior people exhibit after being exposed to an ad. It then becomes possible to pay for the behavior instead of the mere delivery of the ad. This is called performance-based advertising.

A shift from selling audience to selling behavior
The dominating trend in the evolution of online advertising is the rise of performance-based advertising. Predictions are that there will be $40 billion in online ad sales in 2008 and that 50 percent of this will involve performance-based payment. This represents a shift from selling audience to selling behavior.

The traditional form of advertising involves selling audience. In print and broadcast, advertising rates are largely determined by the number of people who will be exposed to the ad. As traditional media employees moved online they took this model with them, selling "impressions." Banner advertising is traditionally sold this way.

Impression-based advertising simply consists of placing an ad somewhere on a reader's computer screen, in a manner similar to placing an ad somewhere on the page of a magazine. Performance-based advertising involves changing the emphasis from views to actions. Instead of paying the outlet to deliver my ad, I will pay it for delivering people.

The most common forms of performance-based advertising are PPC advertising and affiliate networks. Google's AdSense is a classic example of performance-based advertising. Advertisers pay not for exposure, but for the people Google sends to the advertisers' sites.

Even where performance-based advertising is not the obvious basis upon which the advertising is being sold, it is often the way in which it is assessed. Mark Read is director of strategy at WPP UK, one of the world's leading marketing communication organizations. According to Read, many of WPP's clients, especially in finance and automotive, convert the metrics from their ad outlets back into performance metrics.

"It doesn't matter how people sell the ad space; it's bought on a performance basis whether they realize it or not," says Read.

Read is very much in favor of this shift to performance-based advertising. "The advantage of performance-based advertising is that it converts ad spend from a line expense to a cost of goods sold. As such, the expenditure is potentially infinite… The secret of Google's success was to convert ad spend from line of business to cost of sale," Read says.

In other words, the potential income from an ad outlet is much greater than is possible with impression-based advertising. Performance-based advertising obviously represents better value for the advertiser, but it can also represent better value for the seller.

Ben Regensburger, president of DoubleClick Germany, agrees. "If you know your audience and your inventory well you can make more money from performance-based ads than simple impressions, especially in finance," he says.

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Adrian Funnell
Adrian Funnell March 26, 2008 at 2:12 PM

While I agree performance based advertising is a great thing for advertisers, publishers will likely disagree as it creates risk for the publishers who have little to no control over creative for CPC buys, and if buying on a CPA your client's sales or lead process. Inventory control becomes difficult without very sophisticated processes in place as well. At the end of the day the publisher will be calculating their effective CPM and determining if your buy is going to continue to run at the current rate be it CPC or CPA. It can be a great solution for remnant inventory surplus, but buyers will be competition with Google Ad Sense in most cases as well who is providing a turn-key solution on a CPM payout with an endless supply of "Advertisers".

There are risks for Advertisers as well in that while you might get the price you want for your advertising, you may sacrifice volume if the eff. CPM generated is not providing a profitable return in comparison to other advertisers vying for the site inventory. If you have hard Registration or Sales goals, don't bet the farm on a CPA buy providing significant volume indefinitely. You ads will likely also run in remnant inventory and potentially with a high degree of frequency which will lead to diminishing returns over a short period of time.

Performance based buying it's certainly nothing new and in fact was the predominant pricing model in the early 2000's in the US at least when their was a lot of ad inventory going unsold, perhaps another US recession will make this the predominant model again?

Don't get me wrong as a buyer I love performance based advertising and if every site could include some performance based pricing placements to provide opps for DR as well as Brand advertisers that would be ideal but I don't think we'll see the NYTimes selling banners directly on a CPC tomorrow...

A few thoughts on how to buy performance based advertising effectively:

1. Be Transparent - Provide Creative and landing URLs upfront to the publisher before the buy is approved and be honest about historical performance in negotiations. Ad publisher pixels for buys based on conversion and audit with your own systems.

2. Scale - Be prepared to scale budgets significantly and provide a structured upside for the publisher if the buy is effective. Also discuss at what level you will be able to scale the buy from the publisher's perspective to help manage client expectations.

3. Get Creative - if buying banners have a farm of ads and formats to choose from as you'll likely see strong burn-out depending on inventory. As Banner inventory is typically on a premium work with the publisher to create space on the site to provide an incremental revenue opportunity for the site.

Adrian Funnell


Brett Flitton
Brett Flitton March 26, 2008 at 10:49 AM

Performance based advertising is definitely the future of online ads. Knowing what you will get when you pay for it is invaluable. There are many problems that do need to be addressed but the industry is headed in the right direction. I do not think branding advertising will ever go away because it is still valuable but performance advertising will take command.