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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.

The affiliate network is dead: long live performance marketing

The idea
This is the idea that affiliate networks are struggling to justify their margin on each click or referral.

The problem
Theoretically affiliate networks allow advertisers to get to niche consumer needs by leveraging the long-tail of smaller specialist web publishers. In practice this is bunkum.  The 80-20 rule persists and this threatens affiliate network’s market position.

For example.  A large UK retailer uses one of the largest UK networks and is able to “see through” the affiliate network to understand which publishers send it the most traffic.  The results show that 80% of the traffic that this retailer gets is from 20% of the publishers. Consequently there is a big trend in the market for merchants to approach the publishers directly to strike deals, cut out the middle man and split the margin.

This completely flies in the face of the affiliate network model.   Affiliate networks traditionally argue that the value for merchants lies with a large number of smaller traffic referrers: Merchants cannot cost-effectively build links to this vast array of referrers and therefore pay a margin to a network to do this connecting for them.

If merchants can answer yes to the following, the future looks bleak for affiliate networks:
1)    Does most of your traffic come from a small number of high volume referrers?
2)    Can the technology (click monitoring) be created in-house or bought (e.g via direct track) cost effectively?
3)    Is the “missing 20%” low quality traffic.

The solution

Firstly, I have checked this out with a few networks and the message is that it is very unlikely that 80% of their merchants will go direct anytime some.  Nevertheless it is an issue and the networks have a few things up their sleeve:

Networks are offering a wider-array of value-add services & better software to their merchants and affiliates in order to retain them.  This is stuff like stats, bad affiliate alerts, online content tools such as reviews.

Affiliates are evolving to overall “performance marketing” networks.  This will mean they will be offering the whole range of CPA, CPC, CPM, Lead Gen, email marketing, cash-back (like quidco) etc.
We have recently seen a few acquisitions which are not about scale but about breadth (e.g. Buy.at acquisition of xyz).  I also expect to see more acquisitions of analytics and marketing tools.

Opportunities for growth companies.

Affiliates themselves continue to be growing revenues across the board, both organically and by acquisition.  As they evolve into performance marketing networks, I am interested to understand which part of these businesses will end up being most valuable:
•    The databases they own on consumer behavior
•    The margin they take on advertising clicks
•    The optimization and analytical tools they offer to advertisers.

I wonder if any CEOs of affiliate networks or their investors know this?

There are also some interesting lessons for the web-publishers / affiliates.  The message coming from the networks is that the simple “google traffic sites” know for their CPC focus are less and less effective.  I think there will continue to be a flight to quality where traffic from rich, valuing-adding publishes like moveme.com will accrue value.

If your site is proactively sought-out by consumers as a valuable resource to influence their buying patterns, then the quality of your traffic will get top-dollar from the networks (just look at the valuation of MoneySupermarket).  This is the type of affiliate that I’d love to invest in.

When will be able to use cpa for buying cars?

How do we solve the offline purchase problem?

The Adtech conference a couple of weeks ago was pervaded by two smells. One was the sniff of a slowly decaying traditional advertising world, the other was the smell of adolescent exuberance from a bunch of precocious but brilliant teenagers.

Because of this the conference was brilliant.

What has stuck with me is the cleavage between traditional advertising and new generation performance marketing.

The problem with traditional advertising is that performance metrics are woolly. That’s not to say it doesn’t work.  We still see TV adverts for soap powder because of course there is a correlation between offline ad spend and revenue.

What the traditional admen didn't want to address was what will happen when web offers the same reach as tv. They seemed to retort that ideas like a monkey playing the drums will save offline advertising. I am not so sure.

At one level this is an online offline debate, but on another level this is product centric.

You can sell some products, like cameras online, and so using performance metrics like cpas is easy.

But what sort of performance ads can you use if you're Cadburys or Pringles?

How can you prove an online ad makes more people buy chocolate? Its hard.

Its not just FMCG. For example, what about cars? You can have an incredibly compelling piece of advertising that makes someone more likely to buy a BMW.
But they are going to buy it in a dealer.

Why should it matter that offline ads are hard to measure?

When you can’t measure the effectivness of an ad it should worry admen. Advertisers can get measurement elsewhere. They will go elsewhere.

It also worries small publisher sites; what if you have created a niche car blog with the perfect environment to persuade people to buy cars? You can't currently get the 5% lead-gen fee. But by god that’d be nice.

As an investor I am fascinated by this broken piece of the chain. How do you solve the problem? Vouchers? More sophisticated lead gen intermediaries?

I'm looking forward to entrepreneurs telling me.