Saturday, October 25, 2008

Internet Marketing Channels - Display

I am devoting one blog entry to each major Internet Marketing Channel, this one is for Display advertising. People often ask what kind of internet Marketing I work with and I always say everything. Here's a list of what I consider most of everything followed by some definitions, color commentary, and general rule of thumb values for display advertising to help those that have not worked in the space much.

Internet Marketing Channels
- Display: CPM, CPC, CPA/Revenue/Profit Share
- Search: SEO, SEM
- Email: Paid, List Rental, Newsletters
- Affiliate: Internal and External programs
- Ad Networks

Display: Display mostly refers to purchasing banner ad space on third party internet sites. The site paying for the ad and resulting traffic is usually called the advertiser, and the site showing the ad to their visitors is the publisher. My rules of thumb are that well designed banners with compelling offers to reasonably qualified traffic should get about a 0.1% click-through rate (CTR). And well designed eCommerce sites with solid traffic (not junk) and a well-designed and optimized web site can see about a 5-10% conversion rate, with anything over 10% representing a pretty solid site and pretty solid traffic targeting. To me, there are three primary types of contract terms talked about for display deals. My diatribe on each follows with some commentary from both a publisher and advertiser perspective.

1) CPM - Cost per mil. This means an advertiser is paying a fixed amount for every 1,000 impressions of the ad on the publisher's site. Typical price ranges are from $1 to $10 but it varies widely depending on the demographics and intent of traffic. A wealthy demographic looking for information about helicopter tours in Hawaii might demand a very high CPM, but social media traffic that is not paying much attention to banners and is instead looking for ways to interact with their friends right now might demand a very low CPM. A $10 CPM or $10 effective CPM eCPM is considered pretty good, and anything higher than $10 is solid monetization. Realize that a $10 CPM is 1,000 cents / 1,000 impressions, so effectively that is a penny per impression.

Publishers on CPM deals: Normally, the ad impressions are recorded by both sides, on the publisher side they redirect the ad request so they can count requests and the advertisers count requests for the ad and track the referring url for the requests. Unfortuantely, unscrupulous advertisers take advantage of the ability to track visitors to publisher websites upon serving ads to them and they use the visit itself as behavioral targeting data which they then resell to other advertisers (acting as a publisher or simply a traffic data provider). If a deal sounds to good to be true, it probably is. Aside from behavioral retargeting, Publishers typically love CPM terms because it gives them guaranteed income regardless of the advertiser's capability to generate good banner ads or convert traffic. Also with CPM deals, publishers often have the flexibility to mix and match up their inventory as they can best sell it to reduce the amount of remnant or unused inventory they have and maximize the monetization of their traffic.

Advertisers on CPM deals: Advertisers typically dislike these terms because they feel like they can get burned if they are not paying attention. For instance, maybe other advertisers that paid higher CPM's get all of the good impressions from people likely to convert and you get stuck with the ones that are unlikely to ever convert like mobile phones, international traffic, traffic brought to the publisher site under false pretenses, unix or other useragents (browser and operating system types) which can not easily facilitate monetary transactions, or spiders, crawlers and bots which are not going to follow an ad tag link. Accordingly, advertisers will want to closely monitor the conversion of these ads, and have the ability to shut them off quickly before they have spent too much money if they are not performing well from an effective Cost per Action (eCPA) perspective. They may also want contracts that specify what times of day, exact site locations, browser types, etc the publishers can run impressions on. Brand advertisers whose products can not be easily purchased on the web (like frozen foods or pizza that one typically buys at the grocery store) may be less concerned about click through and conversion and happier with CPM deals than other types of advertisers.

2) CPC - cost per click. Each time a site visitor clicks on an ad, the advertiser must pay the publisher for the click. Becoming a de-facto standard as a compromise position for publishers and advertisers, largely due to google using CPC as their only method for search engine marketing and others following suit. Typical CPC costs are in the range of $0.25-$1.00, depending on the expected conversion rate and value of the conversion. Publishers willmontior effective CPM (eCPM) and advertisers will monitor effective CPA (eCPA) for CPC deals.

Publishers on CPC deals: Normally, the clicks are recorded by both sides using a redirect on the publisher side and referring url on the advertiser side. This is a compromise between CPM and CPA deals for all sides involved. The publisher needs to provide quality traffic for the ad impressions to get click-throughs, but it is incumbent on the advertiser to convert traffic directed to them. Publishers will monitor their eCPM (CPC price * average clicks per thousand impressions) for CPC deals because they want to ensure that they are monetizing their traffic as effectively as possible.

Advertisers on CPC deals: Advertisers are very concerned with conversion of CPC traffic. When the traffic arrives at their site, they have already paid for it, so any lost conversion is lost opportunity and turns the lead generation cost into sunk cost. Conversion should be carefully monitored from every source so that sources which convert well receive greater advertising expenditure while sources which do not convert at a profitable level are shut off. Unscrupulous publishers will try to find advertisers that do not carefully segment and measure conversion and marginal profitability so they can pile junk traffic to those sites. Advertisers also worry about click-fraud initiated both by the publisher and their agents and by the advertiser's competitors. There are many many well documented cases of people in low labor cost countries paid to erase all cookies then click on ads so that a publisher can bill for the clicks. Also, bots/http servers have been used plenty of times, even masking useragent values to make it difficult to tell it is a bot and increase CPC charges to advertisers. Finally, and especially for high cost high margin deals like helicopter tours in Hawaii and mortgages (historically) there are many cases documented where competitors click on your banner ads so that you incur the CPC charges but don't get any sales. There is further motivation to do this in SEM, but more on that later.

3) CPA/Revenue/Profit Share - Cost per Action. A publisher gets paid when they send traffic to an advertiser's site and that traffic performs some action on the advertiser's site, ie converts in some way. Variants include full revenue share where the publisher receives 10-90% of all the revenue received by the advertiser or similarly profit share. The publisher versus advertiser profit share rates depend on the margin of the product being sold by the advertiser and the leverage in the market of both the publisher and the advertiser. For eCommerce, CPA typically means purchasing something, and the action is recorded on the checkout page, often with the value of the transaction noted for revenue sharing calculations. But the 'A' can also be registering for a newsletter, installing software, and in the malware industry it can even mean installing a virus successfully on a machine and verifying that by having the virus phone home and demostrate control of the host machine. The CPA may be a fixed amount or it is frequently a percentage of the purchase amount on the other site. Typical CPA's are in the $2-$20 range, and vary widely depending on the value of the action to the advertiser and the conversion of traffic sent by the publisher. Viruses which turn host computers into zombies as parrt of bot networks garner about a $0.50 per machine payout.

Publishers on CPA deals: Publishers typically measure CPA by placing a cookie on a visitor's machine while they are on the publisher's site, then on the page on the advertiser's site after the action is complete, the Advertiser will place a call for a gif from the publisher's domain in the page so that the Publisher can read their domain cookie again and match it up to the referral. The gif is typically a 1x1 transparent pixel so the typical visitor does not even know that the publisher is monitoring their use of the site they were referred to. Typical CPA deals say that as long as the action is consummated within 7-30 days of the referral, the publisher will get their commission, so publishers get paid even if the action happens shortly after the initial click-through to the advertiser site. There are issues because this only works when cookies are accepted and able to persist. Historically this has been 95% of the time, but this is dropping as Firefox use is becoming more widespread, as Firefox has some nifty privacy plugins that allow cookies while you are on a site but erase them once you leave. Also, publishers will monitor their eCPM (average CPA payout * click-through rate * CPA conversion) for CPA deals because they want to ensure that they are monetizing their traffic as effectively as possible.

Advertisers on CPA deals: Advertisers generally like CPA deals as they can ensure that their advertising deals are marginally profitable and cash flow positive. The downsides are usually that publishers want to put a pixel on the conversion page of your site, and advertisers do not neccesarily want to share their conversion volume with every publisher whose site they run ads with. Also, since publishers may be paid up to as many as 30 days after the inital click-through to an advertiser site, it is possible that multiple publishers may try to claim a CPA fee for the same single conversion. Finally, the fact that someone converted on your site is behavioral data which third parties may use to try to target other offers at your site's traffic. Many of these problems can be avoided by building a 3rd party tracking system as I describe elsewhere on this blog, but most advertisers are either unaware or unwilling to pursue this option.

Which one?
Which of the above methods are used predominantly seems to swing with economic conditions. When times are good and advertising budgets are flowing, publishers can hold out for CPM deals, but when times are tight and advertising budgets are scarce and highly accounted for, the few advertisers out there with budgets still flowing can demand CPA deals. There are exceptions, of course, for highly valuable traffic and sites that convert exceptionally well, but generally the ebb and flow goes with the economic times.

At some point, I need to do a post on ad servers, which is the tool typically used for all of these display advertising methods and more. These high volume servers are typically built for speed and very high availability, and include all of the tracking that one desires for any of the methods listed above and more.