Pay for Performance a Good Choice? Do the Math.

Considering the downward pressure on CPMs and the clamor of advertisers for ROI, we thought it appropriate to add the whole topic of pay-for-performance networks to our ongoing series on third-party channels.

Obviously, the pay-for-performance trend is pervasive throughout the online ad world right now, and this fact has not been lost on the ad networks. While many of the larger, traditionally CPM-focused networks such as Real Media are beginning to offer a menu of cost-per-click advertising, several networks are exclusively pay-for-performance focused, including Advertising.comSM and the BannerPort. Although the prevailing metric is still cost per click, some ad networks, such as Value Click, are beginning to offer other cost-per-action pricing, including site registration, download, and purchase.

In many ways, the pay-for-performance model makes good sense for the networks. It’s certainly easier to sell these days than a CPM model. But how good a deal is it for the publishers?

Unfortunately, we must once again offer that tough answer: It depends. It depends on your objectives, the type of site, and your average CTR. But most of all, it depends on the strength of your other options.

Let’s do some simple math. A typical cost-per-click payout to the publisher is about $0.15. An average CTR is about 0.5 percent. That equates to about a $0.75 CPM. Great? No. Significantly worse than some of the CPM networks are getting you (after the commission split, of course)? Maybe not. In fact, it may be better if the CPM networks don’t guarantee that they will sell your entire inventory.

To get a better sense of whether this type of network makes sense for you, you need to assess your own situation. Can you negotiate a better cost per click? Do you have reason to believe you’ll do better than average on your CTRs? If so, these numbers could be better for your site. When you do the math for your own site, be sure to use whatever actual data you have about pay-for-performance metrics you’ve gleaned from other CPM- or CPC-based advertising that has run on your site.

If you do decide to give pay for performance a try, how would you evaluate which pay-for-performance network will be best for you? One of the key variables, we think, is the strength of the network’s ability to optimize CTRs. What type of targeting does it offer? Does your site lend itself to how it sells the space, or will it be lumped into run-of-network (RON) buys only?

Of course, as a direct marketer will tell you, the best advice is to test. Try a sample of your inventory against the performance-based model and see how well you fare. Since none of the networks we spoke to required exclusive agreements, you can try it and see if it is paying off for you.

But while you are experimenting, promise us that you will follow through on what should be an important New Year’s resolution this year: Start working on maximizing the value of your inventory by developing and communicating a better understanding of your audience and how it relates to advertisers’ needs. Because if you are really focused on optimizing your ROI as a publisher, increasing audience value is the most powerful element in the mix — and the one that will open up the most sales channel options in the long run.

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