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Pay for Performance: Online Advertising's Penicillin

  |  November 11, 2002   |  Comments

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If only "pay for performance" meant just that. It doesn't... not by a long shot. Much of what's called pay for performance is more accurately described as "pay for some of the performance we believe we can directly track from the delivery of an impression through to an immediate purchase."

The difference is enormous, and it's creating systemic, long-term problems for marketers and advertisers alike. We must, as an industry, put pay for performance in context while we still have time to preserve the value it can offer online marketers.

Pay-for-performance advertising is a tool to accomplish a job. Marketers have myriad business and marketing objectives they can leverage the Internet to accomplish. For some, pay-for-performance advertising is the right tool. Affiliate programs, paid search, online retail, straight direct marketing, barter deals, and monetization of remnant inventory are all objectives that can be well served by pay for performance. Yet pay-for-performance implementation extends far beyond these objectives into campaigns with goals best accomplished with other tools.

Jupiter Research (a unit of ClickZ's parent corporation) forecasts nearly one-quarter of online revenue will be spent on pay-for-performance ad deals in 2003. When you look at the actual number of impressions bought with that 25 percent of spend, it's several times the share of overall impressions. Pay for performance represents around a quarter of ad spend but a wildly disproportionate 50 to 75 percent of ad impressions delivered to real-world consumers.

Ad buyers know that to maximize the revenue of a pay-for-performance deal, the publisher requires plenty of frequency and remnant inventory. These buyers don't buy context, they buy actions. Publishers are unlikely to use inventory they can sell on a CPM basis to fulfill the terms of a pay-for-performance agreement. Instead, they strip-mine remnant inventory and create pop-ups to induce pay-for-performance deals to pay off.

The seller can only meet the buyer's needs with excessive frequency, often manifested as pop-ups (X-10 anyone?). The negative impact these ad types have on consumers is more than the publisher's problem. These vehicles have been shown to reduce the effectiveness of all online advertising. Otherwise put, getting pay for performance to work compromises the value of the other 75 percent of online advertising. Publishers and advertisers alike face a looming, long-term problem.

The majority of online advertisers need their online campaigns to do more than drive immediate sales at a fixed cost. Many marketers know their online presence stems from its role in the overall marketing mix. They must drive consumer favorability and purchase intent in multiple channels, not sales right here and now and only in the online channel.

Even hardcore direct marketers find pay for performance helps calculate what they paid for a customer but does next to nothing to indicate what that customer is worth. Getting online to generate such higher-level business objectives is not something accomplished by dropping loads of pay-for-performance money. It requires advertisers to plan dollars around desired target markets with publishers who deliver quality content.

If the majority of ad impressions stem from pay-for-performance deals, they are high in frequency and annoying in format. Consumer attitude toward all online advertising will be disproportionately skewed by the pay-for-performance dynamic. This contributes to the tuning out of all online ads. Huge numbers of pay-for-performance impressions dilute the effectiveness of all online advertising. The Web's ability to meet bigger, long-term marketing objectives is put in peril. The quantifiable delivery value of online advertising itself is jeopardized. We cannot afford to squander all that for short-term gains.

The solution is not to eliminate pay for performance but (if you'll indulge the metaphor) rather to employ it as if it were penicillin. Appropriately administered, penicillin kills invasive bacteria and heals. It's a wonder drug. If abused or taken when it's not needed, over time penicillin kills only weaker germs, leaving behind virulent, resistant bacteria that are bigger problems than ever.

Don't abuse pay for performance. Use only when needed. Just because you can load a media plan with pay for performance doesn't mean you should. Match online media vehicles to the job. If pay for performance is the right tool, go for it. If not, you and your fellow online marketers will be thankful in the long run if you do the extra work and find a way to meet objectives with appropriate tools. Of course, it will be nowhere near as easy as getting a quick pay-for-performance fix.

Bottom line: Pay for performance's easy availability doesn't mean it's always the right way to go. It's appropriate only when its strengths match the marketer's objectives. Pay for performance does not meet the increasingly sophisticated needs of Internet marketers. Leveraging anything because it's cheap and available ignores long-term side effects. With pay for performance, these will be bigger problems that will be much more costly to fix.

Take penicillin when you need it, by all means. But for everyone's sake, lay off if you don't. The nasty infection you prevent down the road may be your own.

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Rudy Grahn

Rudy Grahn As a senior analyst with Jupiter Research, Rudy scrutinizes online advertising, marketing, and commerce including campaign measurement and analysis, interactive branding, Internet classifieds, and online performance marketing. Earlier, Rudy oversaw analysis and optimization at SFInteractive for clients including Microsoft bCentral, Adaptec, Verisign, Morgan Stanley Dean Witter Online, Red Envelope and Women.com. He was the founding creative and senior copywriter for i-traffic, where he worked on campaigns for CDNow, Disney, Eddie Bauer, BellSouth, Doubleday Interactive and CNN/SI, among others. Rudy's observations are solicited by The Wall Street Journal, Newsweek, ABC News, The New York Times, Reuters, C|Net Radio, Business 2.0, Wired, The Washington Post and American Demographics to name a few.

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