Much has been written about the surge in pay-for-performance placements that occur on the Internet.
These placements – which include cost-per-click, cost-per-action and revenue- sharing programs – pay the medium a predetermined fee for every action the medium generates, regardless of how many times the advertisement runs.
The attention on PFP programs is fueled by investor pressure on Internet companies to reduce their acquisition costs and/or generate higher revenues. The Internet is a terrific direct response medium and pay-for-performance advertising can generate cost-effective leads for advertisers and turn the media’s unsold ad space into revenue. PFP is a simple model that, when executed properly, has proved beneficial to both parties. The problem on the Internet, though, is that few advertisers and media sites use this type of advertising correctly.
Putting together a successful performance-based advertising campaign is no tougher than executing a traditional advertising buy, with one exception: You need to know the response metrics that make the program affordable for you and rewarding for the media. The better you understand these metrics, the more successful you will be at launching and sustaining a campaign.
To execute a performance-based ad campaign, you first need to evaluate the actions that take place on your Web site that separate window shoppers from qualified prospects. They could include a registration, an application, a download of your software, a purchase or some other undertaking by the visitor.
Next, determine how much you can afford to pay for each of these qualifying actions. You calculate this number by working backward. Take the amount you can afford to pay in advertising to acquire a sale, or customer, and multiply it by the percentage of actions that convert to a sale, or customer.
For example, if you can afford to pay $120 in advertising for each new customer, and 25 percent of your site visitors who fill out an application become customers, then you can afford to pay $30 for each completed application.
Though this may seem like enough to get started, you need to consider whether this per-action fee is enough to make the program a good deal for the media.
The media are not going to like a PFP program that delivers millions of banner impressions but yields a pittance in ad revenue. It’s just as easy for them to drop your campaign and use their inventory toward a higher-paying program. The media income requirement is based on the responsiveness of your campaign, which is a combination of the click-through rate and the conversion rate of click-throughs to payable actions.
Once you calculate the media income requirement and how much you can afford to pay, you need to determine the intersection of these two calculations. The intersection represents the minimum per-action fee required for a successful campaign. To hit the target numbers, you need action-oriented creative that drives visitors to your site and makes it easy for qualified visitors to complete the payable action. The media are dependent on your creative and strategic expertise to do this.
Now that you have developed the economic components, you will need to follow some simple execution rules. First, expect all placements to be pre-emptible. The media should not be expected to tie a PFP program to a guaranteed delivery. They reserve that privilege for traditional cash advertisers. Second, use an independent, auditable third-party source to track payable actions. You will get more media participation as a result. Third, test all placements first by using a small but representative sample of a site’s available inventory. Neither of you will get hurt this way. If it works, expand the placement. If not, drop it.