CPA Trouble Makes Way for Real Business to Flourish

Nine out of 10 articles about the Internet are negative. Few are prescriptive or offer solutions for those in the Internet value chain.

While this is understandable after emerging from the irrational exuberance of 18 months ago, we need a different perspective to emerge from the irrational pessimism floating around as analysis these days.

The demise of marketers ranging from, eToys and to the online media crowd such as Disney’s, Intelligent X and the downward-spiraling AltaVista is really part of the same phenomenon. Marketers and media owners are symbiotically intertwined.

And there is one form of advertising that intimately touches both the media owner and the marketer: cost per action.

These are revenue-sharing deals between the media owner and the marketer. If ever there was a model that explained the symbiotic relationship between the two better than CPA deals, I have yet to see it.

During the first round of the Internet, online media giants such as AOL and Yahoo pretty much dictated the rates. This meant that marketers overpaid for media. This caused them to have customer acquisition costs that were too high.

When customer acquisition costs get too high, companies go out of business in the course of acquiring the customers. Media owners that charged exorbitant media rates — and terrible media buying accommodating them — were a reason why there have been so many business-to-consumer failures. There are certainly other reasons why many BTC companies have had a hard time, but that is for another day.

Some marketers have spoken openly about “extortion” rates charged by the likes of AOL and Yahoo. But what goes around, comes around.

We are now in a media buyer’s market. And media buyers are extracting their pound of flesh this time — so much so that in the second round, media owners are falling like flies.

The main weapon of the media buyer is the CPA deal. After failing to acquire buyers at a reasonable cost by paying the previous “extortion rates,” they decided to stop buying and to rely exclusively on revenue-sharing models with media outlets.

Just as in the first round, when media owners ruled, the CPA deals are ruling in this short second round. This is a short round because there is trouble in CPA paradise.

For some mystifying reason, marketers now think that acquiring customers online should be about one-third the cost of acquiring them offline. They have, therefore, created revenue-sharing deals at one-third the rate that they were used to acquiring customers offline.

Credit card companies exemplify this mind-set. They routinely will pay up to $100 to acquire a credit card customer offline. Online, the CPA payout to the media owner for a credit card customer is around $30.

This is a real example, but it is also symptomatic of what the marketing herd is doing. It is like payback for the past. Media owners have been taking these deals for the short-term money they bring in. But too often, the CPA deals have not brought in enough money to sustain a business.

From an objective media analysis, billions of impressions have been undervalued in CPA deals. Undervalued here means that marketers have acquired customers for less than what they can afford to buy them for.

These low CPA payouts have hurt media owners. As these media companies go out of business, a lot of media inventory simply is disappearing. It is unsustainable for media owners to receive only one-third of what marketers can afford to pay for the media. Along with disappearing advertising inventories are disappearing low-cost orders for marketers.

Hence, trouble in media means trouble for all those marketers that have relied exclusively on CPA. What affects one necessarily affects the other. This does not happen overnight. But the pace is dizzying. The second round has even the strongest media outlets on the canvas. But this is supposed to be an article to avoid irrational pessimism. The third round is just around the corner.

In the next phase, marketers that were hooked on low customer acquisition costs and merrily exceeded quotas have set the bar for their businesses. I know of one company getting 20,000 CPA orders per month.

As media disappear, it will be harder to maintain this level exclusively with CPA deals. And quotas generally increase, so more than replacement is needed. Look for CPA deals to get richer during the coming months. This means that they will pay amounts closer to what marketers pay in other media.

Also, as the quest for certainty in future numbers begins to emerge (Wall Street calls this term “visibility”), many CPA deals will give way to CPM — cost per thousand.

Rates eventually will stabilize to where true symbiosis can take place. An equilibrium between two necessities will emerge during the third round. Rates will emerge where media owners can sustain doing business.

Just as it was necessary for the stranglehold of online media giants to be released in order to build a healthy Internet industry, in some odd karmic law, it was necessary for there to be trouble in CPA paradise to make the way for real business to flourish. Marketers and media owners take heart. There is room for both sides of this equation.

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