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What is performance-based advertising?

What are the advantages of performance-based advertising?

What are the dangers and threats of performance-based advertising?

What do content publishers need to do to take advantage of performance-based advertising?

How to sell performance-based advertising.

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Performance-based Advertising

Performance-based metrics offer both advertisers and publishers greater value than impression-based ones. Here's the inside scoop on this new model...

The future belongs to those who not only can develop content that attracts an audience, but who can frame that content to encourage the behavior advertisers want.

The web is constantly evolving, as we all know. It's a changing environment because people are in the process of migrating from traditional media to online. This migration will not be total -- people will still read books and watch TV -- but the emphasis is changing. Print and broadcast media will become alternatives to the new mainstream -- online.

We are passing significant markers in this migration right now. For example, people aged 17 to 25 now spend more time online than watching TV. I recently spoke to a friend whose son was starting university. He visited the student halls of residence and was surprised to see that none of the students had stereos (an essential of student life in his day) or TVs in their rooms. When he asked about this the students laughed at him -- why would they need those when they had computers and internet connections? To this younger generation the idea of a device that can only handle a single medium, and that isn't connected to the web, is laughably archaic.

It's clear that we are evolving new ways of participating in society, new ways of communicating, and new ways of disseminating information. A key dynamic in this process is the transition of the print and broadcast advertising community onto the web. As this occurs, new models of advertising become possible.

Henry Ford once said "I know only half of my advertising works. The problem is, I don't know which half."

The web solves this problem. The ability to record people's behavior online means advertising can be assessed in terms of the behavior people exhibit after being exposed to an ad. It then becomes possible to pay for the behavior instead of the mere delivery of the ad. This is called performance-based advertising.

A shift from selling audience to selling behavior

The dominating trend in the evolution of online advertising is the rise of performance-based advertising. Predictions are that there will be $40 billion in online ad sales in 2008 and that 50 percent of this will involve performance-based payment. This represents a shift from selling audience to selling behavior.

The traditional form of advertising involves selling audience. In print and broadcast, advertising rates are largely determined by the number of people who will be exposed to the ad. As traditional media employees moved online they took this model with them, selling "impressions." Banner advertising is traditionally sold this way.

Impression-based advertising simply consists of placing an ad somewhere on a reader's computer screen, in a manner similar to placing an ad somewhere on the page of a magazine. Performance-based advertising involves changing the emphasis from views to actions. Instead of paying the outlet to deliver my ad, I will pay it for delivering people.

The most common forms of performance-based advertising are PPC advertising and affiliate networks. Google's AdSense is a classic example of performance-based advertising. Advertisers pay not for exposure, but for the people Google sends to the advertisers' sites.

Even where performance-based advertising is not the obvious basis upon which the advertising is being sold, it is often the way in which it is assessed. Mark Read is director of strategy at WPP UK, one of the world's leading marketing communication organizations. According to Read, many of WPP's clients, especially in finance and automotive, convert the metrics from their ad outlets back into performance metrics.

"It doesn't matter how people sell the ad space; it's bought on a performance basis whether they realize it or not," says Read.

Read is very much in favor of this shift to performance-based advertising. "The advantage of performance-based advertising is that it converts ad spend from a line expense to a cost of goods sold. As such, the expenditure is potentially infinite… The secret of Google's success was to convert ad spend from line of business to cost of sale," Read says.

In other words, the potential income from an ad outlet is much greater than is possible with impression-based advertising. Performance-based advertising obviously represents better value for the advertiser, but it can also represent better value for the seller.

Ben Regensburger, president of DoubleClick Germany, agrees. "If you know your audience and your inventory well you can make more money from performance-based ads than simple impressions, especially in finance," he says.

The drawbacks of performance-based metrics

Christoph Schuh is CMO of Tomorrow Focus AG, one of Germany's leading digital content providers. Tomorrow Focus is the largest supplier of German-language content on the web. As a media owner, someone whose income is based on selling advertising, Schuh can see issues with performance-based advertising.

"The danger in buying performance is that it ignores the value of repeated exposure and of time-delayed responses," he says. "I think performance buying to a single-response dimension will become insufficient; we need to develop behavioral targeting."

Notice that Schuh is not opposed to performance-based advertising. He simply wants to see performance assessment become more sophisticated.

One of the most common problems encountered when dealing with performance-based advertising is disagreement between the advertiser and the publisher over the numbers. Web metrics systems are still fairly primitive, and the web analytics community has yet to establish clear procedures for measurement. As a result, advertiser and publisher systems can often disagree about exactly how many people have been delivered.

"Currently, ad people don't understand the metrics," says Schuh. "This makes resolving disputes extremely difficult."

Addressing this issue requires training advertising sales people in web analytics so they have a language in which to communicate and so they understand what it is their web analytics systems are telling them.

In addition, resolving discrepancies between the advertiser's and the publisher's numbers usually involves a technical conversation about how the data is processed on both systems. The field of web analytics lacks standards, and the few standards that do exist are rarely implemented consistently within analytics software. If both systems are measuring the same thing in the same way, the numbers will match to within a few percentage points.

But discrepancies occur because the two systems are measuring things differently or using the same terms for different things. If the respective technicians explain to each other what their systems are measuring, and how, it is usually possible to adjust the numbers to match. This requires that advertising and marketing people have access to their web analytics technicians, and have the training to be able to communicate with them.

Much of this can be avoided if the methodology for performance assessment is agreed upon before the deal is signed. Once again, this requires that sales staff have sufficient training to participate in such conversations, and that, where necessary, they can call on their technicians for assistance.

The publisher dilemma

As a publisher, performance-based advertising represents both an opportunity and a threat. As Christoph Schuh says, "You have to understand your website better than your client… You have to understand the behavior of your readers in the conversion funnel… You need an ecommerce unit within your editorial team."

Once, the editorial focus was purely on producing content that would appeal to a large swath of the population -- appeal to enough readers and the advertisers would follow. In the early days of the internet, we thought this was all we needed to do. Jim Barksdale, president and CEO of Netscape until the company merged with AOL, said in 1995: "Don't worry about how to earn money online. Simply get a big enough audience and the money will come to you."

This was true for a while, but advertisers are wising up. They're not interested in mere numbers; they want behavior. This presents publishers with a dilemma. We all know you can't make money selling content to readers -- they won't pay for it. The presence of huge quantities of free information on the web has devalued the perceived value of all information in the eyes of the online community.

The main way to make money as a content publisher at present, then, is via advertising. If advertisers become completely focused on performance, editors become confronted with the need to design content in order to get the acquisitions their advertisers want. Should editors, then, write to make sales, or do they write to gather audience and hope the sales just happen because they got the right audience?

In the long term, the future surely belongs to those who can develop content that attracts an audience and, at the same time, frame that content in a manner that encourages the behavior advertisers want.


Talk to me if you want to discuss this, or any other issue.

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