Pay for Performance Means Pay Dirt

At last, Internet marketers are moving from a focus on branding and awareness to thinking about direct response.

We won’t say we told them so. We are just glad that the Web is being seen increasingly as a direct response medium. It’s interactive, it allows unprecedented targeting and it’s measurable. Just right for direct response marketing.

So now the question becomes, how do we get the most value out of our Internet marketing?

The most powerful strategy in post-bubble Internet marketing is pay-for-performance media buying.

This technique harkens to the old days of direct response, when mail-order companies would buy media on a PI, or per inquiry, basis. This means they would pay a pre-negotiated price for each action taken by the consumer, usually an order, but sometimes an inquiry or request for more information. PI deals have long been popular in cable television and print media where there is plenty of perishable space, and publishers or broadcasters are happy to get a little something instead of letting minutes or pages go unsold.

PI has moved to the Web with a vengeance. As advertising budgets decline, Web publishers are falling all over themselves to do deals to get their banner space sold. They will sell based on cost per click, cost per registration or cost per order. Everything is negotiable.

The new mantra is CPA, or cost per action, where the buyer decides what action he is willing to pay for. It could be a click-through, it could be a request for more information, like a catalog in the mail or a PDF download, or it could be a registration. The action could be an order in the traditional sense — an actual transaction.

Since any particular action is theoretically available for marketers to buy by the piece, it is up to the marketer to analyze his selling process and figure out where in that continuum he wants to purchase actions from prospects. A consumer marketer might be building a database of qualified inquirers for future prospecting, in which case a cost per click might be the right deal to make. A business marketer may be seeking to move a prospect along the purchase path, so he might prefer to pay when a piece of collateral material is downloaded.

Before you get stars in your eyes about eliminating your CPM buying and move 100 percent to pay for performance, keep in mind that the world of media sales is entirely driven by supply and demand. There are still plenty of highly targeted niche sites that deliver qualified buyers to marketers who need them. These sites still sit in the CPM catbird seat. PI deals may be negotiable at these niche sites, but the cost-per will be set by market forces. It is the marketer’s job to figure out the allowable and then go to work in the negotiating process.

Notice that the key here is to calculate the allowable. This means the amount of money, on average, that you can afford to pay for the portion of the marketing process in question, and still meet your profit targets. In CPO deals, the allowable is the money left over after adding up the variable costs associated with the product. In other words, you take the revenue on the product sold, subtract the cost of goods, subtract an allowance for overhead, fulfillment and bad debt and subtract the amount needed to show a profit. The remainder is what you can afford to spend on customer acquisition.

Once you know your allowable, any performance deals you make for less than that amount will be good business. Allowables can be calculated across the buying process. A company might know that a single sale is converted out of every 50 clicks, on average. If the company can spend $100 for a sale, then it can back its way into the allowable cost per click ($100 divided by 50, or $2 per click).

Don’t think pay for performance is limited to banner ads. All kinds of Web communications media are negotiable these days. You can pay for performance in e-mail, registration links and newsletter sponsorships. Affiliate marketing is pay for performance by definition. Check out Commission Junction, Be Free and LinkShare, the leaders in affiliate marketing. Or try GoTo, which allows marketers to bid on search engine keywords, paying only when the keyword itself receives a click-through.

While deals are available all over the Web, they can be hard to find. You have to identify the media that will cut deals, go into a series of back and forth negotiations, monitor the results and refine the buy. It is a long process and can soak up a great deal of management time.

No one ever claimed there are any free lunches in direct marketing. The easiest way to approach pay for performance is to pull in an experienced media buyer. These folks have the connections with deal-making sites, they know how to negotiate and can get you up the learning curve fast.

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