CPO: Perpetual Motion for Catalogers

Catalogers and other direct marketers have survived and prospered largely because of their discipline in measuring return on investment. The Internet, however, has introduced a new set of rules and a new means of advertising. It isn’t rocket science, but it can be a costly mistake to wander in uninitiated.

Cost-per-thousand and cost-per-click models each have their place. But apply the wrong model to your business or manage it less than perfectly and you could find yourself out of money and even out of business. The only model that guarantees merchants a profit on every sale is cost per order.

Traditional advertisers have paid for print advertising based on the CPM model, which is based on how many readers might view their ad. As direct marketers, catalogers have a similar CPM cost to print and mail their books to a more targeted audience of potential buyers with a much more measurable response method based on the number of orders placed via their call centers.

However, they share the same frustration expressed by many advertisers: “I know I’m wasting half of my advertising (or mailing) dollars. I just don’t know which half.”

For decades, that was the conventional pessimistic view about CPM advertising. Yet, advertisers were required to allocate most of their marketing budgets to this approach because there have been few alternatives.

CPM still provides value for certain big brands fighting to defend market share. In addition, disciplined catalogers can use the CPM direct mail model because they have something a traditional advertiser doesn’t – the ability to track the orders received from those who are mailed the catalog.

The advent of the Internet provided a new customer prospecting vehicle that catalogers could use, requiring only that a Web site be set up to present products and receive orders. The next step was to use the CPM ad models that were initially created on the Internet, such as banner ads on the major portal sites, to invite shoppers to come to their Web site. The prices for these banner ads were quickly raised to unrealistic levels by dot-com start-ups. Most catalogers avoided this irrational exuberance because of their ROI focus. Today, armed with perfect 20/20 hindsight, we’re all a lot smarter.

The next wave of Internet advertising was CPC. In this new cost-per-click model, catalogers pay only when the consumer sees the ad, clicks on it and goes to the cataloger’s Web site. Though not every click results in a sale, this model is clearly more efficient than CPM. Seems perfect, right? Not so fast. Let’s peel back a few layers and see what we find.

Initially, the model was a fixed-price CPC. The media outlet set the cost it would charge for each click and the advertiser paid the going rate. That worked until advertisers figured out they couldn’t make money. The rules were changed a bit to a bid-based CPC (thanks to Overture and Google). In other words, the advertiser determines how much it can afford per click, then places its “bid” with the media outlet, and the highest bidders are ranked highest in the search results.

Given human nature, consumers tend to click on the top search results first, so those advertisers bidding the highest get the most traffic. Though it’s better than fixed-price CPC, it is not a panacea. In any auction, the winner pays more than anyone else in the game for whatever they “win.”

In today’s bid-based CPC model, one winning bidder may pay only a few pennies per click to attract a shopper searching for penny loafers whereas another bidder may pay $20 or more to attract someone to a credit card or gaming site. Consequently, while the bid-based CPC model is everyone’s darling of the moment, logic tells you that the current levels of the high-flying model cannot be sustained. Paying for clicks and praying for orders will continue until the irrational bidders are out of business, and those remaining use a scientific ROI calculation basis to determine their bids.

It’s unlikely that CPC will crash to the level CPM has, but it’s virtually certain that it will fall off and find equilibrium at a point driven by market forces, and that point will be a fraction of the current euphoric levels.

What’s the right answer? That depends on whether you are selling the media or buying it. If you’re selling it, CPM and CPC are perfect. But if you’re buying it, the only perfect model is one that ensures you make an acceptable profit on every sale – a CPO, or cost-per-order, model.

This solution is simple, so why isn’t everyone doing it? Because traditional media outlets lack a reliable means to track transactions all the way through to the sale, so they have no way to bill the merchant of record on a more cost-effective CPO basis. It takes a certain technology to manage the CPO model, and that technology is costly and time-consuming to develop. But there are notable companies that solved this riddle and support multiple merchants with a CPO model: Amazon, eBay and Shop.com.

Amazon has opened its selling platform and extended its customer base to other merchants. EBay is the “World’s Online Marketplace” and the acknowledged leader in auctions, but it is expanding into fixed-price stores for certain merchants. Shop.com is an alliance of retailers, catalogers and e-tailers offering consumers “easy access to the world’s best products.” All three companies deliver orders to merchants in return for a percentage of each resulting transaction – CPO.

But wait a minute. You already have a Web site. Why should you pay a commission to these guys? The answer: incremental sales.

The Web has changed the rules, and the consumer is now in charge. Consumers shop where it’s most convenient for them, which may or may not be your site. But when they use the Web to search for products they don’t otherwise know where to find, sites that offer authoritative selection are appealing. No individual merchant can offer authoritative selection, particularly across multiple categories. These sites can, and do.

Moreover, when consumers can easily find products that suit their needs at prices they’re willing to pay, they buy. And they buy without caring which options they didn’t see. If your products aren’t offered side-by-side with other merchants, you lose.

“But,” you think, “I have a great brand. My customers know how to find me.”

True. But do they always think specifically about your brand when they’re in that 48-hour hot zone where they’ve made a decision to buy, and now it’s just a question of from whom? No way.

Among direct marketers, the biggest of the big have only single-digit market shares. Brand strength is wonderful, but great branding means selling more products to more consumers more often. You should do everything in your power to drive consumers directly to your Web site, toll-free number and retail store. But you also should participate in every available third-party marketing strategy that’s affordable. It shouldn’t matter where they buy as long as you get the sale.

If there were such a thing as perpetual motion in marketing, CPO would be it. Since merchants make a profit on every sale, the model is infinitely sustainable.

Will it outpace CPM and CPC? Maybe not, because every merchant will continue to do what’s necessary to drive traffic to its own Web sites, and the media outlets (who can only support the CPM and CPC models) will continue to play a role in that process. But CPO is a superior model for merchants and, as such, will continue to contribute an increasingly larger part of their sales volume.

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