The new Holy Grail or just lazy marketing?

An interesting concept has risen from the burning embers of last year’s dot-com advertising frenzy: pay-for-performance advertising. Being new to the industry, it is sparking debate. Is it a sales gimmick of increasingly desperate online media owners or a new secret weapon for marketers?

Marketers must consider whether they want to place their brand in front of millions of “eyeballs” at a fixed cost, through the traditional cost per thousand ad impression (CPM). Or whether they want to pay for a set number of responses at a guaranteed price, through pay-for-performance advertising.

Before shrugging your shoulders at this version of the old awareness-versus-response debate, ask yourself: do your products have a well-defined customer base, let’s say cricket lovers, or cat owners? Can you identify that audience accurately?

If the answer to both questions is a confident “yes”, then CPM will work for you. This is because online media offer more powerful and immediate targeting techniques than any other. By combining these techniques and the intimate knowledge of a customers’ profile, you can squeeze a better response from a tailored ad inventory, and CPM rates will work in your favour.

But if you are marketing a product with mass appeal or you need a broad appeal, CPM becomes a risky option. You should hand over responsibility for optimising response on inventory to specialist operators such as GoTo or Valueclick.

Such operators can charge a predefined cost per click (CPC) because of their mathematical modeling approach to optimising the number of clicks from inventory. This is their skill, and if yours is a mass-market product, you should outsource the task and leave the risk to them.

But, be aware that CPC has risks. For example, a competition banner, which “tricks” users into clicking on it will generate many clicks. But what do these users do once on your site? Probably very little. If you are working with CPC, make sure your creative work attracts high-quality users.

Then comes the next logical step in pay-for-performance advertising: the cost-per-acquisition model (CPA), where you pay per action – whether a registration or a sale. Few companies have explored this yet, and it is a challenge to make this viable for both media owners and advertisers.

What remains to be seen is if the pay-for-performance concept will infiltrate offline advertising.

Dorothea Arndt is head of marketing at price comparison website

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