The CMO’s Guide to CPA, CPC, and CPM

The CPA (define) advertising mindset is dangerous, and it can kill your business. I’ll explain how and help you understand why the most successful businesses succeed with a balance of media.

We’re moving toward an ad-buying environment in which marketers are given the option of trading advertising billing methods (CPM, CPC, and CPA) for predictability and guarantees. This turns media buying into a fluid exercise, not a set-and-forget plan. Everyone on the marketing team, from the CMO down to the assistant marketing manager, should understand how the differences in media invoice type (or billing method) influence the level of control, the level of ROI (define), and how the media bought on a CPM (define) basis influences CPA campaigns.

When I was at McCann-Ericson and JWT, my clients weren’t buying online media (there was none); we bought the typical mix of TV (network, spot, and cable), radio, magazines, newspaper, and outdoor, plus assorted other media that included the occasional difficult-to-classify type. As someone working on the account side of the business, I wasn’t directly involved in negotiating or planning, but my teams were pretty tight and communicative. So I learned a lot about the media buying side of the business. Nearly all the media on the plan was purchased based on some derivative of CPM pricing. Back then, eyeballs weren’t online eyeballs, but couch potatoes, magazine readers, and, for radio, ears.

Even in TV advertising where gross rating points (GRPs) were calculated, one could back out of the buy into some kind of CPM, against either the total audience or a segment targeted in the media plan. Tracking was rarely accomplished with any significant level of accuracy. The research required to tie advertising to sales was expensive, so if there was a correlation between advertising and sales at the macro level, everyone was reasonably happy.

For offline CPM advertising, publishers and agencies expended (and still do) a tremendous amount of energy to document and prove to advertisers that the ads ran when and where they were promised. Magazine tear sheets and TV/radio logs were reviewed by agencies. Sometimes, third-party auditors got involved. All this after the CPMs themselves were based on estimates by yet another set of auditing or rating companies (the Audit Bureau of Circulation, Arbitron, or Nielsen, for example).

My point is when buying media on a CPM basis, the marketer wanted the highest level of targeting control possible (offered by the media), as well as verification the media ran as promised. This mode of buying advertising continued as online advertising surged, following the eyeballs of consumers whose behavior was shifting dramatically. However, pre-purchase auditing of sites to verify a target audience or total reach became less important as third-party ad serving (both publisher and advertiser) allowed a new way of validating that impressions were served. (The industry continued to debate how publisher and advertiser ad-server counts could fail to reconcile by wide margins, but that doesn’t relate to paid search).

Marketers buying online media on a CPM basis continue to take advantage of ad-server technology’s precision to negotiate page position and sections within a site. When you pay CPM rates for something other than run-of-network CPM inventory, you expect, and are granted, a high level of control.

PPC (define) search started in the GoTo straight auction model (GoTo became Overture, which is now Yahoo Search Marketing). Marketers got a high level of control over position that rivaled CPM ad placements, though it was fleeting in the case of highly volatile keywords.

With Google, MSN (now called Microsoft Digital Advertising Solutions), and, starting early next year, even Yahoo, you have less control over position as the engines seek to maximize relevance and revenue. Once you pay for advertising on a per-click basis, it’s in the publisher’s or network’s best interest to pick advertisers, creative, and domain name combinations that make it the most money while preserving relevance. Although some engines are allowing position control (e.g., “give me number two or nothing”), the marketplaces aren’t fully predictable. Ironically, much of the influence on perceived relevance and therefore CTR (define) is the level of brand awareness and current advertising in-market for a brand. This means the more you spend on advertising, the cheaper your PPC advertising gets (all other things being equal).

CPA networks, affiliate networks, and direct CPA deals with publishers are similarly driven to maximize revenue. Selling inventory on a CPM guarantees a return. To preempt the CPM deals with a CPC or CPA deal, intelligent publisher ad servers must be confident that the overall yield (effective CPM or money earned) will be higher than an insertion order with a guaranteed CPM. Advertisers and marketers who use the CPA or affiliate networks usually don’t know where or when their ads will run. Publishers, including Google (should it ever get into the CPA network business), are happy to run ads only if the ads make them more money than CPC or CPM alternatives. After all, every ad impression has an opportunity cost.

The CPC marketplace operates in a similar way. Publishers tend to be able to find revenue opportunities where demand has been created by your current advertising, marketing, and PR. CPA publisher are much happier piggybacking on demand you’ve already created than actually creating demand. The perfect example of this is affiliates bidding on brand terms (if they’re allowed to). You create the demand, and the affiliate, working on a rev share or CPA basis, taps that demand. With affiliate or CPA programs, your monthly spending is similarly difficult to predict.

When you put together a media and marketing plan, make sure you understand how these different media types interact with each other.

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