Online Arbitrage

I received a lot of feedback on last week’s article, which discussed pay-per-performance (PPP) online advertising. Most of this feedback was from publishers and traditional advertisers who disapprove of this buying strategy. This issue deserves more discussion, since it’s only normal that vendors and buyers have different points of view. Of course vendors need to turn a profit on every sale, whereas buyers are responsible for stretching their ad dollars (or, in the case of an agency, a client’s budget).

The feedback I received from publishers expressed the view that cost-per-action (CPA) models were not conducive to their long-term viability and that it’s not fair for a buyer to purchase using this strategy. But there are a number of publishers and networks whose successful business models are based around cost-per-click or CPA sales.

As mentioned last week, there are still a number of drawbacks to buying on PPP terms. Very often, the sites lack quality and audience reach, and often have trouble with delivery. It is very unlikely that an advertiser could allocate an entire budget toward these placements, as they would lack a lot of reach and status. (There is a lot of value to regular brand exposure.) There would certainly be a fair share of issues with regard to delivery. But these ad placements can be valuable contributors to the overall success plan.

Some advertisers require such targeted ad placements that exposure is just not available on a PPP basis. However, few would argue that it makes a lot of sense to guarantee some results for the bucks being spent.

I remember learning about arbitrage theory while studying finance back at the university. When an opportunity exists where the mass market either overvalues or undervalues a security, or overlooks an opportunity altogether, there is a brief window of opportunity where you can take advantage of the situation (either buy or sell accordingly to profit on the price margins). Once these opportunities are realized, trading activity will quickly adjust prices, thus eliminating any potential to further beat the market. This brief window of opportunity is called arbitrage opportunity.

Like an arbitrage opportunity in finance, a performance-based deal in the dot-com world is somewhat of an opportunity to take advantage of outperforming the norm. (This is not to say these deals get eliminated if discovered but that they are an opportunity to guarantee some sort of results.) It is possible, however, that some publishers currently offering performance deals will stop offering them due to low profitability.

But there are publishers (ValueClick Inc., for example) that have structured their business plans to offer this service effectively. As long as these price models are offered, can you blame a buyer for taking advantage of them?

I got a response from a representative of a large traditional agency stating that it is disgraceful that performance-based advertising is giving small players in the market a chance to compete. I really disagree, as this is part of the beauty of the industry. It’s great that there are opportunities to succeed, even if you’re not a giant. These opportunities might not last forever (at least the number of publishers offering them), but we might as well recognize arbitrage opportunities while they exist.

There was another great response from someone who said that it is absurd that all the measurability and accountability offered by online advertising continuously gets slapped back in the Internet’s face. We continue to demand more out of it, and it is being held to a higher standard than traditional media. This person even asked if traditional media advertisers should begin demanding increased performance, such as McDonald’s paying for their next set of TV commercials on a cost-per-cheeseburger-sold basis!

I highly doubt traditional media will ever get to this point (although I do have a colleague, and you know who you are, who eats at McDonald’s enough to possibly support such a campaign on his own!).

But, realistically, if vendors are going to offer performance, then it’s up for grabs as an arbitrage opportunity. Businesses and consumers spend most of their dollars as wisely as possible and generally want to see results from their hard work. It is only normal to be as successful as possible with every investment a company makes, and this is just another way of maximizing results.