Is CPA the Holy Grail of Marketing?
Companies that rely solely on CPA deals are admitting that they have no marketing risk tolerance. Throughout business history, every marketer has dreamed of creating transactions without risk. The most recent iteration of this is the notion that a marketer can rely solely on revenue-sharing deals to build its business, thus avoiding the possibility of failed media. At first blush it seems plausible on the Internet, because about 80 percent of all advertising inventory is unsold.
The glut of unsold advertising inventory encourages the notion that owners of media should cut revenue-sharing deals instead of letting the inventory lay fallow. And in most cases, this is compelling logic. The problem for marketers is that too often they get wrapped up in media owners' models instead of how to run their own businesses.
If you as a marketer cannot generate a revenue stream to sustain any marketing risk, you have one foot in the grave and the other on a bar of soap. The flip side is also true. If you own media and likewise marketers cannot generate enough revenue with your space or time to sustain themselves, your feet are in the same situation.
The Internet industry is doing a lot of slipping around and grave dwelling. Let us examine the limits of business models that rely on marketing exclusively through revenue-sharing arrangements.
Presumably, buying media on a cost per thousand basis is too risky, so the CPA model surfaces. But if not enough revenue can be generated to justify buying media, how can splitting revenue or profit with media owners possibly work?
If media do not work for the marketer, they cannot possibly work for the media owner. It is that simple. Here are two CPA examples. In the first, marketers cannot generate a decent revenue per thousand to satisfy media owners, and in the second, marketers generate significant revenue per thousand and media owners are satisfied.
Marketers are roadkill in the first example. They have less than a year to survive unless they find something else to sell. One of our companies experienced this when we were selling videos online. We could not get enough revenue per thousand to buy enough media to make a go of it. If we could not generate enough revenue, splitting that revenue also could not return enough to our marketing partners. Reverting solely to a CPA model meant only that we split the meager revenues per thousand that we were generating. These business models are worse than toast.
In the second example, there are fewer of these "successes" than you would think. While "successful" models in this example are generating impressive revenues per thousand to satisfy media owners, the problem with this model is that it opens the door to competition. CPA models cannot seize market share because the best media (i.e., the most responsive media) will always go to marketers willing to pay for it.
The only situation in which this does not apply is when competition is nonexistent. But if you have a viable revenue model, then you need to suck out all the air from the room before competition comes in. CPA deals cannot do this. If you have a valid revenue model, then you can bet your T-1 that a competitor soon will be knocking at the door of the premier media outlets. And sooner or later, one is going to buy media on a CPM basis and eat your lunch. In the second example, marketers either will change their business model to accommodate CPM buys or lose out to competition.
With this said, why do marketers that rely solely on CPA deals succumb to those hearty marketers risking their capital?
The higher the risk, the higher the reward.
If you are a media owner and a marketer tells you, "Our business model is strictly CPA," that means they lack a sustainable business model. They are either one of the two examples outlined. If you are a marketer and have uttered "we only do CPAs," it is time to get your resume in order.
• Jaffer Ali is president/CEO of PennMedia, Mokena, IL. Reach him at email@example.com.