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CPC, CPA, lead generation does not work

Idea
This is the idea that the old CPA and lead gen models are inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

The problem here is knowing when a user clicks on an ad, and then buys a product, if it is as direct result of that ad.

What lies behind these issues is that click-through does not correlate to purchase.

It is worth a brief diversion to say a bit about why click-through does not correlate to purchase:

1) Clickers
Research shows that some users are just “clickers” and will click on anything. Clickers make performance marketing less accurate. Clickers are not stupid, they are your wife.  And they skew results.

2) Non clickers
Non-clickers make performance marketing less accurate:

“respondents said they were twice as likely to notice a web ad, not click on it, but visit the advertised site later (61 percent) as they were to click on an banner ad to reach a site (30 percent).”

DoubleClick Touchpoints survey, 2006

3) Click before purchase

The last click before a purchase is not the reason why that purchase was made.  Intuitively this makes sense: I am personally more likely to click on an ad for Dixons than I am for ABC Online electrics ltd. This is a result of 20 years of brand-building from Dixons.
The question then becomes: why should I pay a lead-gen fee or CPA to an affiliate if they have not done the work? This is the most potentially disruptive one to all those elegant business models that we are backing.

Solutions

How are people solving the above problems?

1) Clickers & non clickers

Agencies are trying to solve the problems posed by clickers but it’s not easy. One of the most compelling is that from Double Click who offer ”view-throughs”.  With View-throughs, lead generation / CPA is paid even if the browser buys within 30 days of viewing.  The problem is still far from solved.

2) Paying rewards based on effectiveness

If advertisers and their agencies are able to come up with one generic and widely accepted measure of effectiveness, then results can be paid.  This is a fascinating area and I have covered here  .

3) Media mix optimization
Due to the quantitative holes in performance marketing, some advertisers are seeking to attribute value to “total exposure” rather than pay for specific clicks: paying for exposure across the media mix.
NBC is trying out a metric called “total audience measure”, which tallies TV and online impressions: “you have to understand, every medium has a different effectiveness level”. Beth Comstock, president of NBC Universal Integrated Media

Opportunities for growth companies

The big issue for many start-ups with a revenue-model based on CPA or lead gen is the question of whether the last click before a purchase is the real reason for that purchase being made. I personally believe that the current system is the least-worst mechanism that we have and therefore PRICING WILL STAY THE SAME:  The downward pressure on CPAs that would come from recognition of additional brand building will be netted-off by the overall shift in spending from mass to performance marketing.

It doesn't concern me too much that the last click before a purchase is not the reason why that purchase was made.  Why?  Because a great web app will act as a "noise reduction agent" to cut through the advertising clutter. This is one of the compelling things about Moveme.com (Advent Portfolio company): there is a clear development towards reducing the noise and concentrating on signal strength from publishers.

Affiliate Networks themselves are seeing some questions from advertisers about the true effectiveness of affiliate network campaigns . I have previous posted on this.

All web properties; from small blogs, through growing media-networks (like glam.com) to massively trafficked ad-driven models like Dailymotion will have to continue building bigger and more comprehensive databases of their users: profiles, demographics, likes, dislikes.  Advertiser demand for this data will only grow.

I am also convinced that we’ve not seen enough from companies targeting specific influencers in key communities.  I’m excited about businesses helping advertisers go after influencers in specific niches or providing horizontal tools to go after influencers in multiple verticals.

Finally, the enormous shift away from mass marketing and into analyzing performance marketing and targeting will create fascinating opportunities for growth:
•    Managing customer data-bases
•    Analysing customer data
•    Automating the measurement and performance of advertising dollars on-line and offline

Display ads and CPM are broken

This is the idea that the CPM model is an inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

1) CPM.  We still don't know that when a user sees a display-ad if she is more likely to buy that product. We can run focus groups, we can measure clicks, we can run surveys.  But we don't have any directly correlated and measurability.   This is one of the reasons why I am sure we will see a proportional drop-off in display ads (recession or no recession).

2) Forget consumers, advertise to influencers. 
It is not really display that influences buyers at all.  It is key community influencers. 

Solutions

How are people solving the above problems?

1) Targeting 
When you’re concerned about the veracity of your performance metrics, the obvious way to get around them is to advertise only to be people who you know want to buy.

A range of methods exist:
•    Targeting certain online behavior like Blue Lithium.
•    Targeting specific geographies like Yahoo Smart Ads
•    Targeting specific interest groups
•    Targeting certain communities only at certain times “timing”. E.g. look at Freeads.co.uk weekdays 11.30 – 2pm; it will be dominated by McDonalds ads.

2) Influencing the influencers

Good customers cannot be identified soley by their purchases (see Leveraging user generated content from forrester ).

Some advertisers are beginning to believe that it doesn’t matter if you’re CPMs are wrong, so long as you’re targeting the right people. 

“Now it’s about activating people of influence. They will then promote your brand continually because it protects and extends their personal reputation. People activate based on uniqueness of information, trust and credibility of source. CNET claims to be zeroing in on the 50% of advertising that does work.”

Neil Ashe, CEO CNET . See also "Understanding Influence and Making it Work for You,".

CNET claims to get higher CPM not because their audience are High Net Worth Individuals (like FT.com & Economist does) but because their audience is chock full of influencers.

Forrester have gone one step further by claiming that metrics will focus on the acquisition of  evangelists rather than purchasers.  They predict that a completely new metric will emerge called the cost per acquired advocate (CPPA).

3) WOM agencies

A few specialist word of mouth agencies are emerging specifically to target the influencers.  They are telling brands to allocate their cash to specific users and attempting to knock the bottom out of the CPM market.

Conclusions

There seems to be lots of suspicion today over online performance metrics. A number of developments are trying to solve this including media mix optimization and new targeting techniques.

The concept of effectiveness is core to bridging the online offline shift but arriving at a single measure of effectiveness is a big challenge for the industry.

The commonality for all advertisers is that they want all want a reduction in risk. They want to get better bang for their buck.  They know the web is changing things but it’s still too early to know how and exactly what they should do.

Will advertising really evolve from "big ideas" to individual conversations?

The idea
This is the idea that we are now immune to big branding ideas and advertising.  The theory goes that the perfect antidote is web-based and is called (dependent on who you are)

• conversational marketing
• engagement marketing
• targeted advertising

This was one of the key ideas from the research that we did.  I have a future piece on this topic. But I wanted to blog it now because with uncanny timing two of my favourite bloggers have coincidentally written about the same thing on the same day from different starting points.  (Far out and weird man).

V 

Nic Brisbourne thinks that big brand “ideas” won’t work in the age of the web because the general public can complain in blogs that drinking Pepsi won’t make them play like David Beckham.

Russell Davies (who works in the advertising industry) thinks targeted ads will never be that compelling, and there will still be a role for brand ideas from the “great communicators” in the ad industry.  His hypothesis of the “uncanny valley” is brilliant.   

These ideas make for fascinating ruminations and theoretical late night debates on what the future holds.  However, most of my readers seem to be entrepreneurs and therefore more interested in what these trends in the market can mean for them as pragmatic business creators.

I think there are some fascinating opportunities for start ups in these areas, though the jury is out on who “VC-backable” they are.  More in my forthcoming posts.