How to Wage Successful Performance-Based Pricing Pilots

As marketers increasingly demand greater accountability, publishers and agencies that explore more complex and creative, results-focused partnerships will be the most likely to thrive. Those that fail to deliver results, and more specifically, deliver results that are backed by performance-based compensation (e.g., cost-per-click, cost-per-acquisition)¬†agreements, will likely fall from favour. This article explores the trend’s development, addresses publisher concerns, and provides guidelines for initiating a test-and-scale approach, in order to encourage evolution and improve business results for all parties.

Performance-based pricing gives advertisers the ability to purchase a desired outcome, rather than exposure to an audience. This is irresistibly attractive, especially in challenging economic times, as exemplified by the decreased use of the CPM and increased use of performance-based pricing in the U.S., from 2006 to 2010*.

By embracing this trend, publishers revived banner ad sales, which had been waning due to perception that they could not produce an immediate result with the efficiency of search and were best used for long-term brand building. In fact, in the U.S., banner ad revenues grew by 23.1 percent from 2009 to 2010 after growing by only 3.8 percent, 2008 to 2009**, largely credited to adoption of performance-based pricing models.

In Asia, search marketing spends are increasing, ad networks are expanding their reach and ad exchanges, offering greater transparency and auction-based pricing, are rolling out across the region. As advertisers’ familiarity with these options increases, so will their expectation of accountability from all publishers. Despite this, many publishers continue to resist performance-based pricing and exclusively employ pricing models (cost-per-impression, cost-per-day) that deliver a predictable, fixed income.

The greatest source of publisher concern is performance uncertainty; the inability to accurately predict how many impressions it will “cost” to deliver an outcome. To overcome this hurdle, advertisers should share representative creative, demonstrate the user experience, disclose the location of tracking pixels and provide a clear definition of the desired action, for which the advertiser will pay. The publisher can apply knowledge of audience response-rates for similar campaigns on their site, back out the number of impressions required to elicit an action and price accordingly. However, humans (and other factors) are unpredictable and projections may be “off”, so the inclusion of a mutual 48-hour out clause offers further protection; protecting the publisher from delivering too many non-converting impressions and the advertiser from tying up budgets that could be applied elsewhere.

While both parties want maximum flexibility in order to minimise risk, the test must produce results that are meaningful and actionable. Therefore, the minimum pilot duration, during which the out clause cannot be enforced, should be long enough to give the publisher time to diligently analyse and optimise performance. The investment should be just enough to produce enough data, following a significant amount of optimisation, to be statistically significant and indicative of future performance. We usually accomplish this in just a few weeks, by running media at very light weight that increases toward the end of the period.

To avoid ambiguity, formally document all details of the test. Define the desired action, single source of data to be referenced and data-sharing method and frequency. Try to anticipate all possible questions. For example, will the advertiser share all activity data or only end-action data? Will the publisher be compensated only for immediate activity or also for latent activity? If the latter, what is the look-back window?

The concept of accountability may be new to some publishers and they may have little experience with data analysis and optimisation. If a publisher shows significant potential in other areas, the advertiser might provide support in filtering data (e.g., creative execution, size, placement, time of day, day of week, geography) and suggesting adjustments. In all cases, the advertiser should share a reporting-only login for the (ideally third-party) tracking platform and/or arrange for automated reports to be sent to the partner at their preferred frequency.

This degree of involvement may seem inefficient, but the bulk of the effort takes place during the initial negotiation, short pilot period, subsequent data analysis and adjustment to pricing. A successful pilot can quickly scale into an agreement that is capped only by the publisher’s ability to deliver incremental impact.

For example, years ago, we were approached by a publisher that reached a highly specific audience at the perfect window for considering our client’s product. We suggested a limited pilot (duration, activity, spend) during which we would pay $6 USD for a completed transaction, a competitive rate at the time.

Following the pilot, they determined that this arrangement was lucrative and we continued to purchase as many leads as they could deliver. Over time, as we replicated this test-and-scale approach with many more partners, $6 was no longer competitive. We re-negotiated to $5.50 and then $5, our current rate, which is still lucrative for them.

Though they are no longer our most efficient partner and we are probably not their most profitable advertiser, the relationship is continued because of the volume delivered and the operational efficiency on both sides. The creative seldom changes, due to high audience turnover (i.e., no creative wear-out) and the placement that we own reaches all relevant traffic.

Someday soon, most publishers in Asia will offer performance-based pricing like this; made more viable through significant technology upgrades, which automate optimisation, inventory management and pricing. For those of us who are restless, this test-and-scale approach can help move the process along; increasing revenue and operational efficiency for all involved.

*Source: Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC), *IAB Internet Advertising Revenue Report: 2010 Full-Year Results, Slide 19, April 13, 2011

**Source: Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC), *IAB Internet Advertising Revenue Report: 2010 Full-Year Results, Slide 13, April 13, 2011.

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