IQ News: Beyond Hits & Clicks

Some online advertisers want to tie rates to direct sales. In the early days of online advertising, life was simple. Advertisers paid basic ad rates, which evolved into cost-per-thousand impressions, or CPM, models. Then, the clients got a little more demanding. It wasn't enough to deliver blizzards of page hits; they wanted to know who really "interacted" with their ads--and cost-per-clicks was born. Now, as the line between online advertising and commerce grows increasingly blurred, an ominous new word has been floating around the industry: accountability. No longer content with pageviews or clicks, some advertisers are requiring that ads lead directly to sales. And while the industry is moving toward hybrid models that mingle payments for audience with back-end performance incentives, some sites are even agreeing to straight cost-per-transaction deals. "The hybrid model is for e-commerce advertisers who are looking to generate sales as a result of banner advertisements and links," says Rich LeFurgy, chairman of the Internet Advertising Bureau. "It's where I think the market has evolved to." LeFurgy says the shift toward hybrid models has been emerging for about three to six months, though the overall ad community still prefers CPMs because they are easy to valuate. So what do they look like, these Frankenstein arrangements that are one part direct marketing and one part traditional advertising? The deals are mostly long term, about six to 12 months, because it takes time to develop a track record. And what the advertiser pays up front is typically a lower amount than a straight CPM. "This is really equitable for both parties because the media site gets valuation for its audience. The advertiser gets a [model] that's more performance based," LeFurgy says. "In this case, both parties get what they want." Grey's online buying arm in New York, media.com, has been doing straight performance-based deals since 1996. Far from a vote of no-confidence, such deals exploit the Web's strengths, says President David Dowling. "We very much feel that this medium can be much more accountable than other forms of media," Dowling says. "It's really important that we reflect that in the way we buy." Another proponent of cost-per-sale models is Myer Berlow, senior vice president of interactive marketing at AOL. "It's really in response to our effort to create a business model that is a win-win for both sides," he says. Peter Meluso, chief service officer of New York media planning company i-traffic, says the company has moved from CPMs to cost-per-clicks, and now sales-based models, for e-commerce clients such as CDnow and Disney. "We want to maximize the number of transactions," Meluso explains. "Some sites and some folks who are buying may think, 'What does it matter?' But in actuality, an impression that doesn't convert someone is a lost impression." Not everyone, however, is sold on the value of revenue shares. Unlike AOL's Berlow, most content providers have been reluctant to take responsibility for so many unknowns. What if an advertiser's ad is not compelling, for example, or its prices not competitive? What happens when the server at an online store gets swamped or its secure ordering is too complicated? "It's really troubling to some new media companies because it puts all the risk on them," LeFurgy says. Gina Garrubbo, executive vice president of Women.com in New York, says the company already analyzes its sites' performances. "We are being judged on how we perform on the back end," she says. "We do it indirectly." Garrubbo, who favors CPM and clickthrough deals, contends that eyeballs are the key to marketing on the Web, especially for highly targeted sites such as her company's Women's Wire and Healthy Ideas sites. "We believe it's more than direct sale. We believe it's a branding mechanism," she says. "This audience is la creme de la creme. These [advertisers] are Fortune 500 companies." Paul DeBraccio, group advertising director at Tripod, Williamstown, Mass., is also skeptical about what the company would gain from cost-per-sales. "We get approached regularly, and the economics just haven't made it worthwhile," he says. For proven, high-traffic sites, the argument for a cost-per-transaction model seems even less appealing. Anil Singh, vice president of sales at Yahoo, says the majority of its models are CPM-based. Yahoo doesn't plan to do CPTs, even though advertisers frequently request such deals. "We've certainly considered it, and I would expect them to ask for it, because they're asking for a no-risk deal," he says. "We believe there's value in advertising. There's value in our medium. "The bottom line is there're a lot of sites out there that will do click-throughs or transactions," he says. "We've built a property that has significant value in a traditional media model." Caught between reluctant content providers and show-me-the-money advertisers, the two leading ad networks have different takes on the cost-per-sale model. Chris Theodoros, vice president of creative sponsorship strategies at DoubleClick, New York, says the company began doing small tests late last summer and now uses the model for many sponsorship deals. "Cost per acquisition can define very quickly whether programs are going to work for both the advertiser and the site," he says. However, Chief Executive Officer David Moore, of 24/7 Media, New York, doesn't buy it. CPM models are easy for the network to track, he says, while keeping track of cost-per-sales is a "nightmare" because the information does not spill back into 24/7's system. He favors a pared-down version: cost-per-leads, based on the number of visitors that request more information, or fill out online forms. "Leads is the most lucrative thing to do right now," Moore says, especially for clients such as insurance and car companies and travel agencies. So what can advertisers and media companies expect when they sit down at the bargaining table? Just about anything. "For all, it's a learning experience," i-traffic's Meluso says. Those who will be on board for back-end guarantees will include "the smart advertisers who are ROI driven and have means to measure performance." And despite the hesitancy of some sites, says Michael Cohen, president of New York-based iballs, hybrids will be an unavoidable topic in the future. "I don't see hybrid pricing going away. I think it's an intelligent [solution] for advertisers who want some kind of guarantee for their money and for sites that want some kind of guarantee. It's a compromise."

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IQ News: Beyond Hits & Clicks

Adrienne Mand

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Adrienne Mand