NONE: ONLINE-ADS>> The death of CPM advertising for product and service
ONLINE-ADS>> The death of CPM advertising for product and service
Tom Gerace (tgerace_at_befree.com)
Fri, 17 Oct 1997 12:48:02 -0400
sales?
Sender: owner-online-ads_at_o-a.com
Precedence: bulk
I was interested to read Kristine Loosley's note about the difference between
click-through and sales information as a basis for advertisement purchase. Ms.
Loosley illustrates the difference between advertising for brand building or
traffic growth and advertising for sales (retail or service). In fact, she
pinpoints the driving force behind the rapid growth in affiliate networks as the
primary means to increase retail and service transactions on the net: it's sales
that matter in the end.
> The reality is that clickthroughs are irrelevant unless you aren't selling
> anything. Let me illustrate. If my goal is to drive traffic to my site, a
> compelling ad and its concommitant clickthrough is relevant. If my goal is
> to sell a $29.95 web hosting account, then the # of clicks is irrelevant
> and the number of SIGNUPS is the only thing that is relevant.
...
> There's also not necessarily a relationship between quality of ad and
> clickthrough. One of my ads won a "best of web advertising" award for
> messaging and creativity and never got better than a .26% click rate. Go
> figure. One of my lowest-budget ads is the one that got 7% BUT the
> SELLTHROUGH from that ad was much lower than the low clickthrough ad. In
> other words, now you have to monitor not only the CPM and the clickthrough
> rate and the quality of the ad, but how effective WERE the clickthroughs.
> I actually buy primarily on the "cost per sale."
Our experience in operating affiliate networks to date (most notably,
BarnesandNoble.com's) shows that there is significant variance in both
impression-to-click and click-to-purchase ratios from affiliate to
affiliate, and
from product to product on a single affiliate. Because of that, we've included
decision support information (a variety of analysis and decision support
tools that
help to optimize both ratios) for both retailers and affiliates in our BFAST
affiliate network management technology. We've found that, by changing
listings,
listing techniques, and locations, (while keeping impressions the same)
affiliate
sites can see as much as a three-fold increase in their sales.
With Ms. Loosley and other on-line sellers (with on-line transactions)
focused on
sales, I can't help but wonder if the affiliate network model (long-term,
pay-per-transaction relationships) won't replace most banner advertising as the
method for product sales. Affiliate networks are far more cost-effective
methods
than transactions for increasing sales. Moreover, because pay-per-transaction
arrangements ensure costs will scale directly in proportion with gross revenues,
affiliate networks are exactly the kind of advertising a retailer wants: you pay
for only what works, and pay only what its worth. In this way, on-line
retailing
becomes more of a science: my margins before advertising are 20%; I can
spend up
to 19% on marketing efforts to grow market share and still make a profit. If my
affiliate network (including commissions to affiliates) is less than that 19%, I
should have an affiliate network.
This isn't to say that content sites will lose money by the disappearance of
product advertising. Quite the contrary, a site that proves to be an effective
seller could make more money through properly negotiated affiliate network
arrangements than through advertising. Remember, the idea behind an affiliate
network site isn't that the affiliate lists all products available. Rather,
retailers benefit from affiliate relationships when they tap not only the
affiliate's traffic, but also the affiliate's expertise and audience
orientation.
A site on gardening knows more about gardening books than a book retailer and
gardening tools than and on-line hardware retailer. If they list on a
given title
and their audience is interested in and trusts their recommendation, their
click-through and sell-through rate will be quite high.
Consider this example:
Model 1: CPM Advertising Campaign
CPM= $20
10,000 impressions
Percentage of space sold: 25% (75% used for house ads/very low CPM ads)
Total revenues to site: $50
Model 2: Pay-per-transaction campaign
Product/service cost: $50
Commission rate to affiliate site: 10%
Click-through rate: 8%
Clicks-to-sales ratio: 25%
Percentage of space used to show transactions: 100% (no space need go
unused--
higher traffic=higher site payoff)
10,000 product views=800 click-throughs= 200 purchases=$10,000 in gross
sales=$100 in site commissions
Certainly, the model above assumes (1) a relatively high purchase amount
($50) and
a significant commission amount (10%). That means that the site must choose its
retailer relationships carefully and pay close attention to the terms. Higher
commissions result for longer term deals where the site makes commitments to the
retailer about freshness, placement, and number of links. Unlike cost-per-click
advertising, longer-term relationships exist within the affiliate network model,
allowing these points to be negotiated; a profitable relationship between
retailer
and content site can emerge.
The model also assumes that the affiliate performs quite well (8%
click-through to
the purchase page and 25% of click-throughs sell product). This requires
that the
site choose its retailers and product links carefully. Our Gardening Site might
sell books on gardening very well, books on cooking with fresh ingredients
pretty
well, and books on the recent Mars landing far less well. Here, the site
must make
intelligent choices about which products/services to display, and how much
exposure
to devote to each one.
If our garden site sells its books well, makes effective use of all impressions,
and exceeds resulting site-wide average CPM through affiliate
relationships, they
have an incentive to move away from CPM and toward lasting affiliate
relationships
with product and service providers that sell items appropriate for their site
audience. At the same time, a retailer or service provider has lower costs than
CPM advertising and those costs are predictable and linked directly to gross
sales...does this mean the death of CPM advertising for product and service
sales?
Our expectation is that there will be a dramatic increase in the number of
pay-per-transaction relationships formed between retailers/service providers and
content sites over the next 12 months. These relationships will be
longer-term and
will require product or service offerings be interwoven with appropriate
content on
the affiliate site. The increased integration of content and sales on-line will
lead to distributed selling, where the secret to on-line retail will be
location,
location, location, location, location, location. We expect retailers will
see more
than half of all sales resulting from distributed selling by the year 2000.
As the importance of location (or placement on affiliate networks) becomes
obvious,
we expect to see an increase in competition for affiliates that prove to be
effective sellers. Sellers will offer increased commissions (tiered to
reward good
sales performance), product discounts, and (more rarely) guaranteed minimums to
capture successful sellers. This competition for virtual shelf space will
make the
development of long-term affiliate relationships a viable alternative to CPM
advertising for sites that prove to be effective sellers.
Tom Gerace, President
Be Free, Inc.
PS Before I go, I should identify my (perhaps obvious) biases and their
roots. Be
Free, Inc. provides tools to enhance on-line product and service sales and
advertising (including the sale of Virtual Shelf Space (tm)). Our BFAST
software
is the only product on the market offering flexible, integrated end-to-end
management of affiliate networks. Our BFIT product allows retailers to use
sales
information as a partial basis for delivering targeted advertising.
BarnesandNoble.com uses both BFAST and BFIT on their affiliate network.
=============================
Tom Gerace
tgerace_at_befree.com
617.497.5630
617.497.5734 fax
Be Free: Building the Virtual Marketplace
http://www.befree.com
==============================
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