*Pay for Performance Gaining Popularity

As companies continue to tighten their belts, pay-for-performance marketing providers appear to be gaining ground as sources of cost-efficient online marketing. Despite this trend, however, the cost-per-thousand-impressions deal still holds the top spot as the most popular ad buy.

Pay-for-performance marketing is made up predominantly of cost-per-click, cost-per-acquisition and affiliate model deals where an advertiser only pays if a desired action happens.

These models have taken a back seat to CPM ad buys on the Web during the advertising explosion that appears to be dwindling.

CPM has been at the forefront because sites that sell on an impression basis — meaning the buyer pays for a consumer to see an ad versus act on it — stand to make a lot more money.

High-profile sites such as Yahoo, Lycos and cnet have little motivation to offer pay-for-performance deals, said John Davis, marketing supervisor at Media Contacts, New York, an interactive marketing solutions provider and consultancy.

“The big players in the space will never give into that,” Davis said. “They're making a load of money on CPM deals. CPM deals are the most efficient way for vendors to make money.”

One of the barriers to dissipation of expensive and often ineffective CPM deals is that many buyers are still willing to pay a premium for such buys.

“There are still companies out there that will pay,” Davis said. “I don't know if they have money to burn or what. The CPM will never go away.”

Performance-based advertising will have its day, however, according to Forrester Research, Cambridge, MA. A recent study predicts that pay-for-performance models will account for 50 percent of online advertising budgets by 2003, up from 15 percent in 1999.

Suppliers in the space see the shift already. One indication of the growing popularity of pay-for-performance deals is that companies such as Commission Junction no longer have to explain their business models, said Scott Horst, vice president of marketing at Commission Junction, Santa Barbara, CA.

“People know what we do in greater frequency than before,” he said. “We don't have to educate people.”

Commission Junction functions as an affiliate marketing network for pay-for-performance advertising. Merchant sites load their banners and other online ads into the network, and content sites select what to place on their sites.

Content sites can earn money in various ways. Merchant sites may pay 10 percent of the purchase price of a product sold as a result of a click through, or they may just pay 5 cents a click or $1 per new registered member. Commission Junction earns 20 percent of whatever commission is paid out. The network has more than 1,500 merchants and 325,000 content affiliate sites.

Business is booming, Horst said.

“Now we're considered a must for many companies. It's more cost-effective to only pay for results,” he said. “Companies are much happier that way. We've got a big backlog of merchants. We can't get them through the system fast enough. Merchants are up about 50 percent each month.”

John Ardis, vice president of marketing at ValueClick, a provider of performance-based online advertising solutions, said the market is ripe for this type of solution. “The impression-based world is under unbelievable price pressure. I've been told the average CPM cost has plummeted from an average of $40 to $15. What that means is ad buyers are becoming increasingly savvy in saying, 'What I'm getting is not worth what I'm paying.' On the performance-based side, you know exactly what you're going to get.”

ValueClick, Westlake Village, CA, acquired a key competitor, Click Agents, earlier this month. The two companies combined can serve ads to 24,000 Web sites worldwide.

Davis, who negotiates CPM, CPC and CPA deals, said that of all the forms of online advertising, “clients absolutely want CPA deals.”

This is not easily achieved. However, what often happens is a vendor and a buyer agree on a hybrid deal, where if a company spends a certain amount of money on a CPM deal, the vendor site will also allow for certain CPA deals. “For a hybrid deal, you need to back it up with a CPM deal,” he said.

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