PetSmart acquired Pet360 for $130 million in cash and up to $30 million more in future performance-based payments.
Pay-for-performance marketing moves to center stage as online retailers demand sales, not traffic. Pay-for-performance marketing will move from a third of expenditures now to more than half in two years.
A much-quoted statistic bouncing around Internet retailing these days is Forrester Research Inc.’s forecast of a boom in pay-for-performance marketing. By 2003, says Forrester, marketers will hammer portals, content sites and other online publishers to take pay-for-performance pricing for 83% of the online marketing they do.
Pay-for-performance deals-p4p, if you will-are nothing new, but they look different now. For one thing, there are more of them, as the Forrester survey demonstrates. Over the next three years, the traditional cost-per-thousand deals among the 51 e-retailers that Forrester surveyed will shrink from 38% of online media spending to 18%, while purely performance-based ad deals will balloon from 39% to 52% of ad spending.
And the pay-for-performance deals are being more tightly managed to produce better results for both marketers and operators of content sites that host the retailers’ ads. Affiliate network providers like Performics Inc. are digging deeper into their networks and spending time and resources to zero in on hooking up retailers with the content sites most likely to deliver buyers. “We looked at our data and recognized that only about 5% of the affiliate sites were really driving sales,” says Kate Bergin, vice president of marketing at Performics. “The 20/80 rule-that 20% of your customers deliver 80% of your sales-is more like 5/95 in this business. We look at pay-for-performance marketing differently now. We don’t look for thousands of affiliate web sites. We just look at the few sites we think are going to deliver the most traffic.”
And there’s another new wrinkle: The pay-for-performance model is infiltrating large aggregators like portals. Traditionally, smaller content or publishing sites have been forced to accept pay-for-performance deals because they were unable to promise advertisers a portal’s huge traffic numbers. But that’s changing. “A few years ago, retailers were telling the portals, ‘We’re going to give you $1 million for this placement,’” says Jim Nail, an analyst with Forrester Research. “Now they’re going to the portals at renewal time and saying it wasn’t worth $1 million - either they lower the rates or change the structure of the deal or they’re out.”
For portals used to straight CPM deals and for affiliate networks striving for even better results, the shift toward pay-for-performance deals is a trend that means they’ll work harder for ad dollars. And for savvy online retailers the rise of pay for performance is a trend that could put them in the driver’s seat as never before.
Impressions aren’t sales
A softening ad market, due to the number of dot-com drop-offs, and a downturn in the economy, have sent online ad rates plummeting. Rates of $30 per thousand impressions from two years ago have dropped to $4 to $5. Marketers woke up to the fact that impressions don’t necessarily mean sales, and they’re insisting on more accountable results from ad campaigns. And in a shifting landscape, publishing sites like major portals that depend on ad revenues have had little choice but to respond. “It used to be that advertising expenses were front loaded before e-retailers even generated any revenue,” says Mary Brett Whitfield, director of PricewaterhouseCoopers’ E-Retail Intelligence System. “They were in a land grab for customers. It wasn’t unusual for a retailer to spend 100% of the projected revenues on marketing expenses. But then a lot of those online retailers went out of business.” The survivors reined in ad budgets, which effectively drove down ad rates.
While it’s easy to snicker now at companies that went kaput over giving portals like Yahoo! millions up front, it made sense at the time, points out Rudy Grahn, a Jupiter Media Metrix analyst. “At the time, people were fairly open about the fact that no one was giving these portals $50 million because they expected to get $50 million back in sales. They did it because if they could put out a press release saying they just did a big deal with AOL, the stock price could rise by a huge amount,” he says. “That was the environment.”
Faced with fewer and pickier advertisers, those publishing sites have become more willing to accept deals they would have turned down a few years ago. Industry watchers from media buyers to research analysts agree even the large portals are signing more contracts now that include elements of pay for performance.
But the portals themselves are mum on terms. “It’s never in the publishers’ interests to admit they’re doing pay for performance,” says Jupiter Media Metrix analyst Marissa Gluck. “They don’t want one advertiser to find out if they cut a pay-for-performance deal with another advertiser. They need to protect the integrity of their rate cards.”
Top placements in portal categories such as travel and technology still sell out at top CPM rates. But the fact is, portals have been doing pay-for-performance deals for other inventory, such as run-of-site or placements in less trafficked areas like general news and entertainment, for a year and more-just not directly. Excess ad space on portals often goes to affiliate networks, which sell it on a pay-for-performance basis. “That way, the portals could claim they weren’t doing pay-for-performance deals,” Gluck says. “But in fact, there is portal inventory sold that way-just not through the portals themselves.”
This has set the stage for pay for performance to come on strong as marketers attempt to squeeze more out of their online ad budgets. “One of the hardest things about advertising is tracking what works and what doesn’t,” says analyst Charlene Li of Forrester. “Pay for performance puts a huge laser light on top of that advertising because it holds the company accountable and the media company accountable. Retailers are finding it very valuable because they can anticipate how much they need to spend to get a certain result. You can tell almost immediately if a campaign is working or not.”