While several industry studies predict that online ad spending will decrease in 2009, activity in the online video segment might be cause for industry optimism. According to eMarketer's predictions for 2009, video ad spending will grow despite the current economic climate, rising by 45 percent this year to reach $850 million.
Even with the guarded optimism about projected market growth, the current model for monetizing online video isn't working. Ad networks, video technology providers, and other industry players are at a loss when trying to find a model that can grow significant revenue. For years, the online video industry has been relying on a TV-based scale for measuring the effectiveness of a campaign. The traditional cost per thousand impressions (CPM) model, originally adopted in the TV world, doesn't translate to the online video market. Lacking a better standard, the industry took an old model of monetizing TV and slapped it onto the latest online technology.
Online video advertising is still a relatively new medium. Marketers and advertisers alike are looking for the best way to utilize this new channel to effectively engage users and convert them to customers. As the industry evolves and viewers continue to gravitate from television to the online channel, the industry needs to evolve alongside its audience by transitioning to a performance-based pricing (PBP) model.
Online video is a completely different animal than TV -- content is consumed in a much more interactive experience between the consumer and the brand. The user is not just served a static 30-second spot like with television. Instead, they have the ability to connect and react with the ad on a much more personal level.
Today, online video ads can be developed with thousands of variations, enabling consumers to make choices in real-time and giving them more control over the content they consume. As a result, the online audience offers a heightened level of engagement, providing increased awareness and recognition for brands that television doesn't offer. This kind of innovative advertising with deeper flexibility and interaction deserves its own ad model that is mutually beneficial for both the video provider and the brand.
In today's economy, brands expect more value from their advertising dollars online and are skeptical of paying for impressions that don't provide measurable ROI or result in sales conversions. Likewise, video providers have been hesitant to move away from the CPM model for fear of missing out on a more predictable revenue stream. The advantage of a performance-based pricing model is that it better aligns the goals of the brand and the video provider, while sharing the economic benefits of a successful campaign.
A straight cost-per-action (CPA) model isn't realistic. However, a tiered PBP dynamic -- where advertisers pay a rising scale based on impressions, cost per click, engagement, interaction, and sales conversion -- brings more value to the advertiser, while rewarding the vendor for converting a consumer to a customer.
Brands realize that consumers are more valuable to them as they progress deeper through the online video ad food chain, and are willing to pay more at each level of interaction -- as long as it's measurable. It makes sense to link the deep flexibility and interactive nature of the ads to a similarly flexible pricing model where everybody wins.
The performance-based pricing model can work most effectively when there is a direct-response dynamic associated with the ad because the vendor is rewarded the most when the brand reaches its ultimate goal of transacting a sale. There is not one standard way to structure this new way of thinking; brands and vendors need to work together to customize a performance model that is mutually beneficial. Any number of elements could be included in this payment structure, including:
- Cost per impression (CPM): Serving the ad to the consumer.
- Cost per click (CPC): Getting the consumer to click through the ad to the brand's site.
- Cost per engagement (CPE): The consumer watches a video or sends information to a friend.
- Cost per action (CPA): Delivering a quote or more information, such as a whitepaper download.
- Cost per sale (CPS): Converting the consumer to a customer.
The performance-based pricing model takes into account the fact that an impression is great for brand awareness, but won't impact the bottom line the same way a click-through or conversion does. Developing premium campaigns with a heightened emphasis on the end goal -- conversion rates -- positions the tiered PBP model as a clear recession winner and delivers the most value to the brand.
The advertising industry was founded on the driving principle of creativity. Today, the industry needs to be creative in developing an approach that makes more sense. Innovation is often born in trying economic times, and this is a great way of eliminating risk while advertisers experiment with new technologies.
Naj Kidwai is CEO of Real Time Content.
