A New Pricing System for Online

There are a few pricing models for online advertising and we all know them well: CPM (define), CPC (define), and CPA (define) being the major ones.

But recently, Ari Rosenberg brought me a very novel and intriguing pricing model. It’s so unique that he patented it and has some pretty major advertisers and publishers using it. It’s called IPC, or impressions per connections pricing.

Maybe we’ll all be buying media with this new pricing structure some day. Here’s what Ari had to say about it.

Harry Gold: Ari, please tell me a bit about your background and how you came up with IPC pricing.

Ari Rosenberg: I used to be sales manager at Snowball.com (we changed our name to IGN in 2001). We had three “hub sites” at the time, including IGN.com, Chickclick.com, and Powerstudents.com.

While on our sites, I had noticed how often we were running ads that didn’t seem to fit. Our sales folks were great at pumping in ads that made very little sense for the audience our brands attracted (Ameritrade running on Chickclick.com, for example).

At the same time, I also learned firsthand what it was like to have a campaign I sold get canceled because the ads did not perform well. This was a strange feeling coming from traditional media sales and I was resentful that revenue I booked would cancel because “their” creative didn’t work on my site. I knew there had to be a better way to formulate a deal structure where everyone could benefit and performance on all sides was incentives.

HG: So that is where you came up with the idea for IPC pricing right? Please explain what IPC pricing is.

AR: IPC pricing stands for “Impressions per Connection” and in this approach, which has earned a United States patent (US 7,089,195), the publisher agrees to allocate impressions at a “said sale price” and then provides an incentive of bonus exposure to the buyer based on the performance of their creative.

Publishers who have licensed the rights to use this pricing model use it in the following fashion. They first establish the budget requirement needed to activate IPC pricing. Then they negotiate the paid CPM and provide the “IPC” — in this case IPC stands for “impressions per click.” (Keep in mind, the model can reward advertisers based on any measurable form of connection made between an ad and a consumer.)

So, for example:

• Budget: $75,000
• Paid CPM: $10
• Paid impressions: 7,500,000
• IPC (Impressions per click): 250

The paid campaign runs and each click the campaign generates earn 250 bonus impressions. So the better the campaign performs, the more bonus impressions are earned, which means the advertiser pays a lower effective price (in this case a lower effective CPM) for ads that consumers connect to more.

The IPC pricing model changes the dialog between buyers and sellers so the burden of performance becomes equally shared while inducing greater collaboration so better results can be achieved. Ironically, this model diffuses the issue of click fraud because fraudulent clicks help the advertiser versus hurting them.

HG: What are some problems this solves?

AR: Despite all of the complexities of online advertising, there are only two ways in which ad space is bought and sold. The first is when media is paid for based on a CPM. In this approach, however, it is the advertiser who bears all of the risk because if the ad does not perform, they still pay the publisher for the access to their audience’s attention.

The second approach is CPA with the “A” standing for any defined measurable action such as a click through. (So this also includes CPC.) In this approach, it is the publisher who bears all of the risk because they don’t get paid unless the creative execution elicits the attention and desired action of the consumer (hence the Ameritrade ads on Chickclick.com.).

In both existing approaches, there is an uneven distribution of risk involved in the purchase and this contributes to the underlying tension that exists between the buyers and sellers of media. This is the problem IPC pricing addresses.

HG: Why does this model work for both buyers and sellers and why did it earn a patent?

AR: First the latter. In the history of buying and selling media, bonus exposure has been part of the conversation between buyers and sellers but it has always been tied to the amount of money spent by the advertiser. For example, if you buy eight pages in print, you may earn two incremental bonus pages as part of the agreement. IPC pricing is novel in that the total amount of bonus exposure earned is not tied to how much the advertiser spends, but rather, how well their ad connects to the publisher’s audience.

So it’s obvious that this model helps both the agency and the advertiser. But how does it help my publishing clients armed with the rights to sell this way? (Publishers with the rights to offer the IPC pricing model as an option to their clients include Hachette’s WomansDay.com and Pointclickhome.com, as well as Scholastic.com, Parenting.com, CQ.com, CQPolitics.com, Governing.com Bettyconfidential.com, Guideposts.com and prior to shutting down, the print reps at Hallmark magazine sold inventory on Hallmark.com using IPC pricing).

The benefits to the publisher are best explained through a metaphor. Think of the publisher as a gym, and the buyer as a gym member. It’s almost preposterous to threaten to cancel your gym membership because the “gym” failed to get “you in shape” but that’s what it feels like when buyers threaten to cancel campaigns when their creative doesn’t perform well.

What would happen if the “gym” offered a free week for every pound you lost? Members would work out harder, stay in better shape, and would likely renew their membership.

Every “gym,” a.k.a. publisher, has unsold inventory. Many choose to allocate this inventory to ad networks in return for low cost ads and even lower quality creative, which lowers the perceived value of their “gym.” Publishers who use IPC pricing allocate unsold inventory to the ads their users find more compelling and the ads their sales team sells directly — thus building a stronger partnership while populating their site with ads in “better shape,” which leads to higher renewal rates or at the bare minimum, limits the cancellations.