Direct Response is upon us. Live with it and ‘Fill a Need’

So how hard has the recession hit online advertising?  The growth of the industry has grinded to a crawl in comparison to almost every consecutive year going back to 1996.  Some say 3%, some say 6% and some even say 0%.  But not all sectors match this trend.  Search is projected to push a 15% growth in 2009.  In general, affiliate and lead-gen spending is also expected to continue to grow at a similar pace.  Yes, the recession is impacting spend levels this year, but it is how advertisers are spending their dollars that is really what has changed.

Advertisers are changing the paradigm of online advertising as we know it.  Direct response is leading the trend as the pony to bet on.  If you can’t track the impression, you had better be able to measure the click and the conversion.  Even better, pay for only the revenue you generate – or as close to the conversion as possible.

Impressions yield clicks, yielding leads and then conversions.  We all know the drill.  The advertiser wants to pay for someone that is further along in the pipeline and the publisher wants to charge for someone that is at the beginning.  But with the advertiser roping in their level of spend, and shifting dollars towards direct response opportunities, publishers are feeling the squeeze more than ever before.

Remnant inventory volume has grown from 30% to 70% over the last four years on many mainstream sites, and the number of ad networks clearing the inventory has ballooned to over 450.  The incestuous relationships between the multiple ad networks and ultimately the exchanges [insert RightMedia] means that the clearing of remnant inventory is going through repetitive cycles.  The smart advertisers can get targeted inventory for pennies on the dollar, provided that they are willing to work with flexibility and without guarantees of fill or placement.  An advertiser can get CNN through an ad network for example, but may not get all of the inventory or all of the positions they want.  But they will get it for much, much less.  Furthermore, they may be able to get it on a CPC or even CPA basis which all ties nicely back to their desire to be in the direct response mode.

Direct response is our new buzz word ladies and gentlemen.  It is what all of the agencies are now saying to their advertisers.  The concept of the internet being a 1:1 communication mechanism is not new – it’s just that now advertisers are demanding that they buy advertising under the guise of that model.  If you’re goal is to sell product, you want to pay for sales, leads, or traffic.  Branding through online advertising has fallen way off – demonstrated by the flat-line of display ad spend growth this year.

So back to publishers.  What do they do?  The advertisers are circumventing them by going through the resellers to get what they want while the publishers get to continue to claim that “we don’t sell CPC.”  In the meantime, publishers collect decreasing CPM dollars from the networks in exchange for their remnant space while the networks optimize and resell under CPM, CPC and CPA – satisfying a growing advertiser base.

If the publishers were to deploy multiple pricing model optimization technologies similar to the ad networks, they too could maximize these opportunities, cut out the middlemen and recognize that there are BIG revenue opportunities in multiple pricing models.  Furthermore, they stop the sucking sound coming from their client base and take advantage of the inflow of new spenders in the industry.  Not all advertisers want to buy on a CPC or CPA basis.  It does not always pay.  But a willingness to work with advertisers and meet the direct response bug would open up the door to a huge base of advertisers that have already walked away or who are slowly backing off.

The right technology that will enable a publisher to work with multiple pricing models and even with multiple networks to create optimization layers, will mean “yes I can work with you Mr. Advertiser.”  Optimization of inventory is the key play here.  Innovation through technology will enable the publishers to re-emerge and service the NEED that is present in the market.  See a need, fill a need.  Publishers that address the advertiser that wants to buy direct response, or at least the option to buy direct response will satisfy their existing customers and grow their customer base.  That will result in increased sell-through and overall growth in revenue.

“If I sell CPC, who will buy my CPM.  I won’t sell CPC or CPA and cannibalize my CPM business.”

Who would?  If I were suggesting to ‘throw out the baby with the bath water’ I would be writing about fool’s gold.  But I’m not.  I am writing about capturing lost revenue.  Sometimes sales people don’t have the ability to conduct business development and conceptualize how to sell one thing in order to sell another.  If you want to sell CPM inventory, back up to what you really want.  It’s the revenue per thousand/RPM.  Use that pricing to figure out the approximate performance of an existing client and determine the CPC they would need to pay.  Then go back to them and offer them a hybrid deal.

– If you know an advertiser is willing to spend $50K; and you know that $50K on 1M impressions at a $50 CPM has been yielding 75K clicks, then you know they are paying $1.5 click.

– So that advertiser should be willing to buy more media, perhaps an unlimited amount of additional media at some CPC below $1.5.

– If you, as the publisher: 1) maintain the right to control what inventory is provided, (2) control what volume will be provided (meaning no guarantee) and (3) have access to performance reporting in real-time, then you can maximize the utilization of your remnant space back to the RPM.

At a bare minimum – as a publisher – you have now introduced direct response to advertisers that may not otherwise be willing to increase their level of spend.  Additionally, you have gained access to their performance metrics so now you can see what their conversions (and their metrics), which means you can determine what the net CPC is by combining the two models.

“What happens when the advertiser comes back next month and tells me they only want CPC advertising, no more CPM, or nothing at all.”

Good question and a likely to be an issue.  Managing to the RPM is the primary objective.  And shared risk is what has to be put on the table for the advertiser.  For the first time your advertiser is looking at the opportunity to buy the premium inventory through a direct response model.  “Woohoo!” she is thinking.  But you have the benefit of knowing they are comfortable paying $1.5 CPC and that with your new hybrid model you may have brought them even slightly lower than that.  Furthermore, you managed to increase their $50K spend to $75K per month.

Now what?  The advertiser wants CPC only, so share the risk.  Consider a CPC only relationship, with an extended term (like three months instead of one) and a minimum guarantee of $100K.  Obligate the advertiser to spend more over a prolonged period of time, and mutually invest both of you to work together to continue to optimize the performance.  Nobody gets lazy and the direct response relationship will get off on a really good start.

With this approach, a publisher is able to roll out a CPC pricing model on select inventory to select advertisers under a controlled process.  From there you can determine how to approach new advertisers that you either lost or couldn’t get because of your CPM-only policy.

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