Revenue Sharing Deals: Separating Myth from Reality
Revenue sharing deals are cost-per-click or cost-per-transaction ones in which you pay only for the results that an ad brings in. Ever since the beginning of business history, every marketer has dreamed of creating transactions without risk. Marketers relying on revenue sharing think they can avoid the possibility of failed media. At first glance, it seems plausible on the Internet because approximately 80 percent of all advertising inventory is unsold.
So, why then do these marketers succumb to those hearty marketers who risk their capital? The answer lies in the relationship between risk and reward. The higher the risk, the higher the reward. Ironically, as media owners reduce risk for marketers, their reward does not increase commensurately. This pushes media owners to harbor feelings that they are being used. They then try to find alternatives designed to lower their risk.
The glut of unsold advertising inventory encourages the notion that media owners should cut revenue sharing deals instead of letting inventory remain unused. In most cases, this is compelling logic. Marketers often get wrapped up in media owners' models instead of how to run their own business. Marketing competition will compel a CPM model instead of a CPA - revenue sharing - model.
Let's say that you, Marketer A, have a deal with a Widget site owner on a CPA basis. The Widget site is sending loads of traffic your way and you are converting many into orders. Everything seems fine until the Widget site owner does the calculation and discovers it is making an equivalent of $1.73 per thousand page views. He goes to Marketer A and says, "Look, I am sending you all of this traffic at what comes out to be $1.73/M in my pocket, and this is not enough to keep the site running efficiently. I need a higher payout to give me a higher, effective CPM."
Marketer A: "Mr. Widget site owner, I told you all along that this should go into your unsold inventory. You are looking at this all wrong. You should be thanking me because when you compare the $1.73/M that you are making in your unsold inventory, by definition, this is $1.73 more than you'd be making without me."
Then Marketer B comes along, and he is willing and able to buy advertising on a CPM basis. Marketer B is in the same business as Marketer A. He has been monitoring all of the "affiliates" or CPA deals that Marketer A has been making. Now, he approaches the Widget Site owner:
Marketer B: "Mr. Widget site owner, I noticed that you have a revenue sharing deal with my competitor. I hope it's working for you. Can I ask what your effective CPM is?"
Widget site owner: "Well, I am not too ecstatic about this. I send them all this great traffic and only get what turns out to be $1.73/M, and I have to wait for my money. My stats and theirs don't always match, and they do such a poor job of converting my highly qualified traffic."
Marketer B: "I'll tell you what, I will buy 50 percent of your unsold inventory - no questions asked - for $1.50/M. How about if I buy 250,000 page views this month to test it and I'll even pay upfront?"
Widget site owner: "Wait a minute. You want me to make less than what I am already making?"
Marketer B: "Look, I am willing to risk my capital and lower your risk. If my site goes down, I am still paying you. If Marketer A's site goes down, you get nothing. Furthermore, I am talking cold hard cash here. I am not asking you to send me traffic and leave money from your hard-earned page views to the whims of my ability to convert the sale."
Widget site owner: "OK, show me the money!"
Marketer B: "Oh yeah, one last thing. As long as I'm paying you this cold hard cash, you have to make my company the only one on your site selling our product line."
Marketer A has just gone to the bottom of the class.
This example reveals a larger problem of the limitations of an exclusively CPA marketing model. If competition is nonexistent, this does not apply. CPA deals are great for everybody - to a point. But if you have a viable business model, then you need to let out all the air from the room before your competition does. CPA deals cannot do this. If you have a valid business model then you can bet your T-1 that a competitor will soon be knocking at the door of the premiere media outlets. And sooner or later, one is going to combine both the CPA deals with the CPM deals.
My father was an immigrant and one of the first cliches he learned - and passed on to me - was: "He who pays the piper calls the tune." Marketers who have figured out a way to combine CPA deals (through affiliate programs and special arrangements) with the ability to grab prime ad inventory on a CPM basis really will call the tune.
Jaffer Ali is CEO of e-mail newsletter network PennMedia.com, Tinley Park, IL. His e-mail address is firstname.lastname@example.org.