The Search Marketing Advisor Newsletter Article: August 2006, Volume 5, Issue 8
The Rise of Cost Per Action Pricing
by Ben Perry, Ph.D., Paid Search Director, iProspect
Lately, I’ve noticed several companies trumpeting the arrival of ad delivery systems that work on a “cost per action” (CPA) basis. This means advertisers get charged only when a user performs a certain action. Revenue.net, Accoona and recently, even the mighty Google have announced (you guessed it) a beta test of the concept. For all three, the CPA ad program would not replace pay per click models – it would be offered as a separate option. This is a positive turn of events within the industry and could be good for the engines as well as certain types of advertisers.
Why Advertisers Like It
It simplifies bidding. There is no need to worry about working out the ROI equation on each of your keywords and bidding appropriately. You can legitimately bid the same in all situations and by definition you’ll never exceed your cost per action tolerance. This is a great benefit to advertisers who use search marketing as a direct marketing channel, which still includes the vast majority of advertisers.
It is also low risk. In a normal cost per click (CPC) auction, you can inadvertently waste a lot of money if you don’t know what you’re doing. In a CPA auction, you only pay the engine when you get paid. So, the risks of failure are virtually non-existent, assuming you track correctly and know what you make on an action.
Why the Engines Like It
CPA pricing is a boon to the engines in certain ways. First of all, it allows the engines to avoid discussing and defending themselves against click fraud complaints. Since you are only charged for an acquisition, this rules out click or impression fraud. Fraudsters are a wily bunch though, so I wouldn’t rule out the possibility of some new form of fraud that preys on the CPA model.
CPA pricing also allows the engines to run ads as they see fit, where they see fit, to produce acquisitions. The engines can therefore better monetize ads that companies wouldn’t pay much for on any other basis. This could be because the ad space is low quality and no advertiser could pay little enough to justify the expenditure on a CPC basis.
Perhaps the most significant reason the engines like it is that the CPA auction is efficient and it pushes advertisers to bid as much as they possibly can, very quickly. Advertisers won’t feel the need to cautiously inch up the auction, bidding a penny more here and a nickel more there until they reach their ROI tolerance. The advertiser can simply say, “I’ll pay up to $50 for an acquisition, get me as many as you can,” thereby cutting out all the games advertisers play in a CPC auction.
Despite all these benefits, don’t expect the engines to start selling all of their ads on a CPA basis. In CPC auctions, the engines have made countless millions on ego bidders and other advertisers who spend like drunken sailors despite paltry returns. CPC and CPM (cost per thousand impressions) auctions also have a legitimately different audience of brand advertisers who often drive up the prices beyond what would be acceptable on an ROI basis for direct marketers.
What to Do About It
The CPA auction will rapidly force advertisers to take a good hard look at the factors that influence their ability to bid higher. These are site conversion rate and the amount of profit generated by each “action.” These are the same two basic factors that drive bid prices in a CPC auction, but advertisers will notice it much more quickly in a CPA auction.
The amount of profit generated per action is a function of one’s business model. The conversion rate of your site, however, is something you can affect more quickly. Those advertisers with hefty conversion rates and high profits per sale will dominate the CPA auction. So, as a savvy CPA advertiser, you will need to heed the common advice of constantly testing to improve your campaign and your conversion rate.
If you’re measuring actions on your website and you can assign a value to those actions, then you should probably be testing in the CPA auctions. If you can’t do those things, then call me — because you need some really basic help with your campaign.
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