Is CPA Dying?

Cost per acquisition (CPA) is a dirty term for most publishers. Typically, online media is sold by the CPM (define) metric, which means an advertiser buys media by the number of “raw” impressions and pays a per-thousand fee for it. With CPA, the advertiser only pays the publisher when a customer who clicked an ad buys something on the advertiser’s Web site.

There are too many problems with the CPA model to go into them all. A big one, though, is purchase validation. Most publishers don’t make use of ad-serving systems that can track the conversion on an advertiser’s site. This means using a “Frankenmetric” approach to validating the sale and cobble a number of systems together. In most cases, the numbers aren’t audited.

The good news is CPA is diminishing significantly, and that trend will continue. Let’s review it from the standpoint of current economic trends.

CPA media sales are a patently bad deal for publishers. It’s an activity of last resort for most, when they can’t sell enough CPM ads to make ends meet. What we’ve seen since the dot-com bubble collapsed is extremely depressed online media pricing, driven by a glut of online ad inventory.

An entire industry formed around this inexpensive inventory. Companies developed a sort of media arbitrage, buying cheap media from multiple publishers on CPM and reselling it on CPA. If you had the expertise to build effective creative and place it properly, you made money on the margin. Then, some companies got really smart and started using technology to improve results even further. They used performance optimization and targeting tools to ensure their numbers would always come out ahead.

But the market is changing; most premium publishers are beginning to have shortages of ad inventory. This doesn’t bode well for advertisers or arbitrageurs who made careers off the CPA model. As inventory becomes scarce, the law of supply and demand goes into effect — and prices go up.

Another factor is the continued online migration of large offline brand advertisers. Our disfavored media stepchild was just welcomed back to the homestead. Heavy lifting done by major publishers and industry trade organizations, such as the Interactive Advertising Bureau (IAB) and the Online Publishers Association (OPA) have finally started paying off. We made a case for our value, and brand advertisers are listening.

Lots of other factors are leading to CPA’s death, a big one being that CPA isn’t an actionable key performance indicator (KPI). Businesses today operate on economic models based on appropriate KPIs. Until a business can link its KPIs to incoming marketing data, it isn’t possible to use CPA as a KPI except at the highest levels. In other words, you can look at your total marketing budget and figure out the CPA based on sales, but it won’t help reduce media inefficiencies.

Online e-commerce companies can predictably use CPA as a business KPI, but only if they advertise exclusively online. For this to work, the advertiser must be able to correlate all online marketing impressions to online sales. I ran an AD:TECH panel last year that dealt with methods of measuring all your online marketing and tying it to KPIs to achieve online marketing efficiencies. This won’t help advertisers who spend significant dollars offline or anyone selling through retail channels.

Will CPA selling continue? Let me put it this way: if brand advertising is the most robust media dollar (read: lucrative to the publisher), then direct marketing will ascend in weak media markets (e.g., 2001-2004). Are we trending toward a weak or strong media market? I’d venture strong. That means brand dollars will rise fast in the foreseeable future.

Maybe fast enough to absorb all available premium inventory in our market. This means CPA will be relegated to remnant and undifferentiated inventory. This bodes well for publishers and traditional media mix advertisers. It doesn’t bode well for performance marketers. Or at least, it relegates the value of those players to a niche rather than leading the market.