First appeared in San Jose Mercury News Forums, Nov 18, 2006.
"The sex of your baby predicted CHEEP! Guaranteed Results. 150% REFUND for wrong predictions"
There you have it - a simple and sweet business plan if ever there was one. But people who ponder can promptly peer past its imposturous garb. This is just gambling in disguise. Suppose the service costs $1.00 and a thousand naive couples paid for it. On average, five hundred of them will receive a refund of $1.50; the rest will presumably be happy to have been told the sex of their baby. Despite the refunds, however, the service provider is $250 better off than she was before, and for no more effort than flipping a coin for each customer. Immediately, one can tell that the scheme is a rip-off, aimed at defrauding innocent parents-to-be of precious baby-dollars.
To the uninitiated, that is exactly how CPA advertising is being framed by ad-networks steeped in profiting from traditional methods: "Give us your ads. We'll show them. You only pay for ads that result in a sale, but not a cent on the rest." On the surface, yes; this does look like a scam. But fortunately, this is not what CPA is about. In fact, CPA represents the exact opposite. CPA ad-networks don't just flip a coin to show an ad. Considerable effort and investment go into determining where each ad is most likely to appeal, and, of course, web real-estate on which to show ads does not come free either. A CPA network will actually "lose" money if you don't make it and therefore it is in their best interest to make sure you are successful.
I had always thought that CPA would be the fairest scheme of all to advertisers and that its basic principles would be straightforward enough to grasp immediately. But that seems not to be the case, at least as evidenced by a number of articles that describe misconceived notions of what CPA is all about. As recently as last week, Kevin Lee's column in ClickZ claimed "Selling inventory on a CPM guarantees a return ... CPA publishers are much happier piggybacking on demand you've already created than actually creating demand", a telling revelation that bespeaks signal ignorance about how CPA works.
Consider this: After many months of unsuccessfully trying to sell his house on his own, John finally decides to use the services of a professional. Now there's Mike, an established realtor who gladly agrees to stage John's home for several viewings but only in return for a fee for each staging, plus a percentage-based commission should the house ever get sold. But there's also Bob, a young and enthusiastic newbie, who is happy to stage John's home for free, and only takes the percentage-based sale commission. Which one of the two should John choose?
Here is a glimpse into John's train of thought. "Well, Mike's an established realtor. He has a number of contacts and is probably better equipped to get viewings from serious buyers. On the other hand, what does Mike care if my home doesn't sell? He's getting a staging fee anyway, and for all I know, that's probably what he makes his living from. But here's Bob, fresh out of ivy-league school. He claims to have done a lot of research and promises to stage my home in front of the few potential buyers that really matter. What do I have to lose by giving Bob a chance? Nothing really. Mike? About $200 a showing! So if I go with Mike, I'm just really paying to get my house in front of his elite-clients. Hmm..."
At this point John probably wants to find out if Mike's clients are exclusive to him or whether Bob also has access to them. Fortunately, soon he'll find out that there are no exclusive deals on the buyer side. Home buyers are a precious few, and they prefer not to get locked to specific realtors. With his latest hi-tech precision guided methods, Bob has most likely already identified and approached these very buyers to arrange a viewing of John's home. Clearly then, it makes more sense for John to go with Bob, or at the very least give Bob a chance while retaining Mike on the side. If Mike has an exclusivity-clause that forbids John from using the services of Bob, well then - there need be no more explicit a signal from Mike that he feels threatened by Bob, in which case John's better off going exclusive with Bob.
This is exactly the analogy to keep in mind while choosing between CPA and traditional advertising (or CPM) models. With traditional models, you pay to showcase your offering. The ad-network will get paid by you regardless of whether your ads make you money. Once you've signed up to deliver your ads through them, you have effectively committed your funds. To be fair, it's in the interest of the ad-network to make you money, of course. They know you won't come back if you don't realize revenue. But it's just not a life-or-death issue for them like it is with CPA networks. As an advertiser, I'd be prudent to use the services of a network for which making me money is a "burning" issue, not just a desirable one.
A CPA NETWORK THAT IS RIGHT FOR YOU
CPA networks come in several flavors and there's bound to be one that strikes the perfect chord with your needs. A network that offers manual targeting allows you to suggest where you think your ads will perform best. You can choose your ad's destination with levels of granularity ranging all the way from naming specific web pages, down to providing keywords that you think a candidate web page must have before your ads will be considered for placement on them. A network that offers automatic targeting, on the other hand, entrusts the ad-to-web-page matching to cleverly designed Artificial Intelligence algorithms (these are getting better by the day and you'd be wise to give machine determined matching a try). Of course, most networks also give you a menu with varying mixtures of manual and automatic targeting.Because the viability of a CPA ad-network is most closely tied to your own success, you should also expect them to invest the most effort in ensuring the best destination web pages for your ads. For this reason, you can also expect the most automation from CPA networks, and you as an advertiser will not have to learn the black art of tweaking any of the gazillion knobs to route your ad correctly. Very often, due to the sheer number of possible ad-destinations, a machine-determined match in real-time is bound to be of better quality than manual specifications. For example, you could have asked for your Canon-A500 ad to appear on pages under photographyblog.com, but it's quite possible that a different website summarizing features of various compact cameras is a much better destination for your ad than a page under photographyblog.com that talks about scenic spots in Nepal.
In any case, regardless of how the match of your ad to a web page is determined, there is bound to be competition for advertising space on that page. In this situation, networks with at least a nominal amount of automatic targeting tend to do the fairest thing. Ads will be algorithmically ranked by relevance to that page and only then will ties be broken by bid price for the contested spot. In some cases, a more sophisticated measure based upon both relevance and bid-price is calculated; but you will be hard-pressed to find a self-respecting automatic-targeting network, whether CPA or CPC (Cost-PerClick), that shows totally irrelvant ads on a page just because the advertiser offered a high bid-price for that spot.
In this scenario, both the CPA and CPC frameworks work in favor of the advertiser because the networks stand to lose by showing an irrelevant ad (No clicks or no actions mean no revenue for the network). No such luck, however, with traditional or CPM advertising because you as an advertiser have to shell out your precious pennies even if your ads for snow boots are shown on Equatorial Guinea tourism pages.
SUMMARY
Hopefully, you can now see how advertising has evolved over the years to the benefit of advertisers. With CPM, advertisers paid for their ads to be shown, but didn't get performance guarantees. Along came CPC, where the network took on part of the onus of ensuring ad-performance. Ads that weren't clicked didn't cost the advertiser anything. However, this was prone to click-fraud; despite this, CPC was hugely successful because it was the next logical step in empowering advertisers. Finally, CPA is here. One may view this as mature CPC, where the click-fraud problem with CPC has also been addressed.Far from flipping coins to serve its clients, it should now be clear that a CPA network needs to do several things. It needs to collect a vast inventory of destination web-site addresses. It needs to accept and store a large number of ads from advertisers. Every time a web page in its inventory is displayed on a browser, it needs to select the most relevant ads from this bank, resolve ties for spots based primarily on relevance, but also (and only secondarily) on the spot's bid-price, and display the ads. But unlike for CPM and CPC networks it doesn't end here; CPA networks further need to track viewers' actions. If a viewer performs an action that counts, then, and only then, should it bill the advertiser. Clearly, infrastructure to do this is sophisticated, complex and costly. You, as an advertiser, must understand that it is doubly in the interest of the CPA ad-networks to ensure your ads perform the way you want. They want to maximize your revenue because that's the only way they can maximize theirs.
Before wrapping up, let's briefly look at three common myths about CPA.
MYTH 1: In a CPA framework, it is easy to defraud advertisers by generating "fake-actions"
DEBUNKED: Click-fraud is a major problem with CPC advertising and indeed there need be no greater indictment of click-fraud in CPC than a telling statement by Eric Schmidt, the chief of CPC king Google: "...there is a perfect economic solution [to click-fraud] which is to let it happen". There is, in fact, a better solution - CPA. With CPA, advertisers do not pay unless they have a sale, lead, or some other valuable action. Intelligently selected actions are not recorded unless a confirmation page is displayed (at which point your customer has already been "billed"). A fraudster cannot fake such an action without actually being accountable to you.
MYTH 2: In a CPA framework, advertisers don't have any control over where their ads appear.
DEBUNKED: CPA advertisers have at least as much control over where their ads appear as they do with CPC or CPM. In fact, as I described earlier, the CPA network has the most vested interest in ensuring that your ads are well placed. They take your advice on potential ad destinations most seriously because they appreciate that you, as an advertiser, know best about your own domain. Simultaneously, like many CPC networks, they also provide you with the option of leveraging powerful AI algorithms to help you target your ads precisely.
MYTH 3: "The CPA mindset is dangerous. It can kill your business" (quoting Kevin Lee in his ClickZ column)
DEBUNKED: As I have tried to explain, not only is the CPA mindset not dangerous, but it is actually detrimental to your business to not think CPA. To claim that this uniquely customer-empowering natural evolution of advertising can kill your business is regressing back to primitive days. It is like the warning "Sailing past the horizon is dangerous. You could fall off the edge of the earth and kill your passengers."