05

Mar

Internet Advertising Payouts: the Performance Marketing Spectrum of Risk

Posted by: Jeremy Reither

There are all kinds of different ways to pay for (or get paid for) internet advertising. As a newbie, you might get lost in the performance marketing acronyms. But once you understand the text book definitions of available payment term options, it’s important to understand where these options fall on the risk spectrum. When it comes to payment terms, what works for the advertiser isn’t always good for the publisher – and vice versa.

For example, if you’re an advertiser (someone buying ads on another website), you would prefer to pay a publisher (a website owner selling ad space on his site) only when you actually generate a sale from that ad (known as “Cost Per Sale” (CPS)). But from the publisher’s perspective it’s a less desirable proposition because the amount they get paid depends heavily on how skilled you (the advertiser) are at converting website traffic to sales. Risky for the publisher.

Conversely, if you’re a website owner selling ads on your site (a publisher), you would prefer to get paid a flat rate for placing an advertisement on your website (the cost of the ad can be tied to something called Cost Per Thousand Impressions (CPM)). But since this arrangement offers almost no performance guarantee to the advertiser (more risk is assumed by the advertiser) it is often less attractive to advertisers.

Below is a diagram which illustrates some of the most common types of internet marketing payout acronyms, and where they fall on the risk spectrum. Items on the right pose more risk to the publisher, whereas the items on the left pose more risk to the advertiser.

Sample Payment Term Options and Corresponding Risk for Advertisers & Publishers

• CPM = Cost Per Thousand Impressions (“M” is the roman numeral for 1,000)
• CPC = Cost Per Click (Google’s Adwords program is the most well known example of CPC)
• CPA = Cost Per Action (a broad term that refers to a pre-defined action that must occur on the advertiser’s side before the publisher is credited with a sale.
  • Zip Submit = Pay only when a visitor enters their zip code (i.e.: prior to receiving a car insurance quote)
  • CPL = Cost Per Lead (such as when a visitor fills out a mortgage, credit report, or debt consolidation application, or makes a call (aka: “Cost Per Call”))
  • CPS = Cost Per Sale

So, which type of payout is best? That depends on whether you’re an advertiser (buying ads) or a publisher (selling ads). If you’re an advertiser, then flat rate or CPM arrangements are better. If you’re a publisher, then CPA arrangements are better.

So, how do you choose which payout to use? The payment terms you are able to negotiate primarily depend on industry standards. For example if you’re an advertiser selling home insurance, and everyone else in your industry offers CPL payout, you may have trouble negotiating a CPS arrangement with publishers (which shifts even more risk to them). However, advertisers with a lot of pull can often more easily negotiate payment terms which are more favorable for them. And vice versa, the more credible the publisher the more easily he will be able to negotiate payment terms that are favorable for him (i.e. CPM or CPC).

All forms of advertising pose some risk – we can’t hope to eliminate risk in advertising, but advertisers and publishers can negotiate with one another to find payout terms that represent acceptable levels of risk for both parties.