Pay-for-Performance—Advertising Versus Marketing

Back in 1996, Procter & Gamble (P&G) (www.pg.com), one of the nation’s leading traditional advertisers, was looking at the Web as a way to extend its reach and strengthen its brand with Internet consumers. But P&G didn’t want to pay for ads that didn’t perform. So in April 1996, P&G became the first company to move to a CPA (cost per action) advertising model by pressuring Yahoo! (www.yahoo.com) to accept a performance-based advertising plan that required the portal to be paid only when P&G’s banner ads were clicked—and not on the basis of mere exposures. P&G knew that a click-through represented an active interest by a consumer in its advertising message, and were willing only to pay for that action when it occurred.

What Is CPM and CPA?

CPM stands for cost per thousand. An advertiser will pay for the number of times an ad is viewed on a Web site. On the other hand, when an advertiser enters into a CPA (cost per action) contract with a Web site, the company pays only for those people who click on an ad and take some kind of action, like buying something, filling out a form, or downloading a piece of software.

With the P&G campaign at Yahoo!, CPA entered the advertising lexicon and became an alternative to CPM (cost per one thousand impressions) advertising. Up until that point, an advertiser would pay for the number of impressions his or her ad would have. For example, an advertiser would pay $10 for one thousand impressions—or views—of his or her banner ad on someone’s Web site. That would compute to one cent per impression. The advertiser would pay the Web site one penny every time his or her banner ad was viewed by a site visitor. Of course, many banner advertising campaigns cost advertisers up to $70 or more per one thousand impressions depending upon how valuable the viewers were and where the banner ads were placed on the Web site (see Table 1.1).

Source: AdRelevance

In the beginning, CPM advertising paid off. The click-through rates for these banners was up to 10% or higher in some cases. Click-throughs are now below one half of 1%—and dropping—thus necessitating a re-evaluation of the cost effectiveness of CPM adverting and supporting John Wanamaker’s (founder of John Wanamaker & Company clothing stores) oft-quoted lament that “I know half the money I spend on advertising is wasted, but I can never find out which half.”

What Is CPC?

Using CPC—or cost per click—an advertiser pays for the number of times an ad is clicked or how many people actually go to the URL being advertised.

Unlike traditional uses of the CPM model—in magazines, newspapers, billboards, and TV—the unique nature of the Internet gives advertisers a way to actually track performance of ads on a one-on-one basis. Enter pay-for-performance advertising.

Pay-for-performanceadvertising uses two types of tracking methods—CPA and CPC. CPC is a pay-per-click program where the advertiser only pays each time a person clicks on his or her banner ad. CPA is a pay-per-action program where the advertiser pays only when a visitor clicks on a banner ad and performs a certain action on the advertiser’s site, such as making a purchase, filling out a form, or providing his or her e-mail address.

In the world of the Internet, pay-for-performance means a different thing to Internet marketers. Internet advertisers place banner ads on Web sites to generate brand awareness, a click-through, a sale, or some kind of action. But Internet marketers see pay-for-performance as the basis of not just an advertising campaign, but a long-term marketing program. Thus the concept of affiliate marketing joined the e-marketers toolbox.