If you are a marketer using only revenue-sharing or cost-per-action (CPA) deals on the Internet to build and sustain your business, someone is going to flat out take your lunch away from you. You do not have a business model that can survive a competitive onslaught.
Companies that rely solely on CPA deals are admitting that they have no marketing risk tolerance. Since the beginning of business history, every marketer has dreamed of creating transactions without risk. The most recent iteration of this idea is the notion that marketers can rely solely on revenue-sharing deals to build their business, thus avoiding the possibility of failed media. At first blush, that seems plausible on the Internet because approximately 80 percent of all advertising inventory is unsold.
The glut of unsold advertising inventory encourages the notion that media owners should cut revenue-sharing deals instead of letting the inventory lay fallow. And in most cases, this is compelling logic. The problem for marketers is that too often they get wrapped up in the media owners’ models rather than in running their own businesses.
If you as a marketer cannot generate a revenue stream to sustain any marketing risk, you have one foot in the grave and the other on a bar of soap. The flip side is also true. If you own media, and marketers cannot generate enough revenue with your space or time to sustain themselves, you also have one foot in the grave and the other on a bar of soap.
The Internet industry is doing an awful lot of slipping and falling into graves. Let’s examine the limits of business models that rely on marketing exclusively through revenue-sharing arrangements.
Presumably, because buying media on a CPM basis is too risky, the CPA model has surfaced. But if enough revenue cannot be generated to justify buying media, how can splitting revenue or profit with media owners possibly work?
If media does not work for the marketer, it cannot possibly work for the media owner. It’s really that simple. Let’s take a look at two CPA scenarios. In scenario one, marketers cannot generate decent revenue per thousand to satisfy media owners; in scenario two, marketers generate significant revenue per thousand, and media owners are satisfied.
Simply put, marketers in scenario one are roadkill. In this case, they have less than a year to survive unless they find something else to sell. One of our companies experienced this when we were selling videos online. We simply could not get enough revenue per thousand to purchase enough media to make a go of it. If we could not generate enough revenue, splitting the revenue we did have wouldn’t return enough to our marketing partners either. Reverting solely to a CPA model only meant that we split the meager revenue per thousand we were generating. Believe me, scenario-one business models are worse off than toast.
Now, let’s look at scenario-two business models. There are fewer of these “successes” than most would think. While successful scenario-two models are generating impressive revenue per thousand to satisfy media owners, the problem with this model is that it opens the door to competition. CPA models cannot seize market share because the best media (i.e., the most responsive media) will always go to marketers who will pay for it.
The only situation in which this does not apply is when competition is nonexistent. But if you have a viable revenue model, then you need to suck out all the air from the room before competition comes in. CPA deals cannot do this. If you have a valid revenue model, then you can bet your T-1 that a competitor will soon be knocking at the door of the premier media outlets. And sooner or later, one is going to purchase media on a CPM basis and eat your lunch. Scenario-two marketers will either change their business model to accommodate CPM buys or lose out to competition.
With this said, why is it that marketers who rely solely on CPA deals must necessarily succumb to those hearty marketers who risk their capital? The answer lies in a primordial relationship — the correlation between risk and reward: The higher the risk, the higher the reward.
To summarize, if you are a media owner and you hear from a marketer, “Our business model is strictly CPA,” that means the marketer does not have a sustainable business model. The marketer is in one of the two scenarios just outlined. If you are a marketer and you have uttered, “We only do CPA,” it’s time to get your risumi in order.