Pay-for-Success Pricing an Equitable Arrangement

Several years ago I attended a direct marketing conference where the group unanimously declared that Internet marketing had arrived. The hype and predictions flew through the air – “the greatest direct response channel of all time” … “the arrival of one-to-one marketing”… “the next generation for commercial transactions …”

Amid all this, I sat down with a gentleman who wanted to sell me e-mail marketing lists. He had more than 1 million names on file, and he assured me of their quality, their freshness and their sure-to-be-staggering response rates, although he wouldn’t commit to specifics on the results I could expect. When I asked to see his rate card, he smiled and pulled out a freshly printed sheet. The prices looked pretty high, but my new friend assured me, “That’s market.” Anxious not to miss out on the benefits of “the greatest direct response channel of all time,” many marketers were signing over their precious customer-acquisition budgets to vendors like this one, buying vague promises of success for inflated prices.

Years later, we’ve cycled through the boom and bust. List prices have plummeted, response rates have dropped and a peculiar era of marketing spending fortunately has ended. No longer will media hype put pressure on marketers to spend budgets recklessly on untried methods because everyone else is doing it. Marketers who succumbed to high pricing and know-it-all attitudes from Internet upstarts and e-CRM partners selling overpriced banner ads, ineffective e-mail lists and other solutions that didn’t deliver return on investment are now sitting back and saying, “Prove your value before I buy.”

In the new era of Internet marketing, direct response marketers are sticking to the tried-and-true principles of results-oriented direct marketing. Traditional direct marketing has been around for more than 100 years because it works, and the principles of controlled costs and expenditures, specific performance tracking and a diligent focus on ROI have been proved over time.

The Sunday morning infomercial reminds us of the rules by which the direct response game is played. The producer has a media cost, an average sale and a cost of product, call center and other overhead. After everything else, there’s cost per transaction and a profit. The producer might test the show on Sunday, on Saturday, in the middle of the week, in different parts of the country. When a formula works out, the producer can launch a large-scale campaign with the confidence that it will deliver the results he needs.

Until very recently, online marketers have ignored the traditional routine of test and scale. Despite the superior trackability of online marketing, pricing has revolved around the cost-per-look model, whether it’s a CPM rate for a banner ad or cost per name for a rental e-mail list. As a result, online direct marketers have wasted significant portions of their budgets putting their messages in front of people with no interest in responding. Marketers have purchased online advertising and rented e-mail lists based on vague expectations of new business, and results have varied widely.

Now marketers are going back to basics and demanding measurable results for their money. Marketers can easily determine the average cost per new customer acquisition, which will guarantee a successful program. If results come in at the right price, the smart marketer will buy more, particularly if a vendor can offer the ability to roll out subsequent programs with the same price structure locked in.

With their renewed focus on ROI, marketers are demanding a shift to cost-per-action or pay-for-success pricing from their e-marketing solution providers. With cost-per-action pricing, marketers pay only for actual responses. For example, cost is based on the number of people who click on a given banner ad instead of the number of people who view it or the number of people who click on a link in an e-mail message as opposed to the number of names an e-mail marketing message is sent to. With pay-for-success pricing, a vendor guarantees that the marketer only pays for results that meet certain criteria.

While the shift to a fairer deal for marketers is positive, we should be careful of any drastic change, and the market moving toward pay-for-success could be perceived as a little too extreme. True, sites need marketer dollars and have become increasingly desperate as budgets have dried up. As inventory scales, value scales inversely, and sites now accept the burden of testing poor creative and taking anything that someone will pay for. However, carrying the burden of bad banner creative or low response rates should not completely shift to the content provider. Rather, the two groups need to work together to build viable marketing solutions.

The market will likely move back closer toward center, with marketer and source working in harmony to drive results. This is where the e-MSP plays a critical role. As a group, e-MSPs have approached the Internet as the ultimate market makers.

On one side, they have clients lined up who have guaranteed to buy X at Y price. The e-MSP carries the commitment to track performance with specific source coding and determine with the marketer the exact costs and ROI. By playing the formula, they deliver the lubricant the system needs – data regarding what every lead or transaction is actually worth.

The e-MSP similarly enters into partnerships with content sites and lead sources. They understand the arsenal of tactics available – the banners, e-mails – and what the performance variables are for each. They also know thresholds for sites, what makes sense given the context and what degree of exposure the site may be willing to take.

The e-MSPs drive both sides toward agreeing on the right formula to structure and scale a successful, and fairly priced, program. Marketers know precisely their expense and the fixed costs in running a program. Sites understand the value of the inventory they are putting up. The e-MSP works with both parties to manage the risk and drive programs that deliver the rewards both seek.

As sites better understand their ability to deliver conversions, they also will begin to understand the quantities that they can deliver. As marketers see increasing ROI from electronic solutions, they will trend toward larger budgets and more exploration. As long as the e-MSPs continue to make both sides compromise and work toward quantifiable results, we should keep making progress.

And that sure sounds better than paying rate card.

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