Now Playing: Goodbye CPM, Hello P4P

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.”

Pay for performance has grown in tandem with growing pressure on e-retailers to perform financially. “The rise of affiliate or pay-for-performance marketing is a function of what the marketplace was asking for,” says Jupiter’s Grahn. “When retailers came online a few years ago, the key was growth and growth was measured primarily by quantitative volume—we need X number of registered users by this date to get the next round of funding. So there was a time when programs were very focused on the acquisition of customers more than profitability. But now the market is asking for something else.”

And that’s sales and profits, not just traffic. As a result, the most common online marketing deal now is a hybrid that combines a front-loaded payment with performance incentives. For example, a retailer would pay a set amount on the assumption that the publishing site would deliver a certain number of visitors, with additional payment if they delivered more click-throughs. Additionally, retailers are making shorter-term deals and putting escape clauses that give them an easy exit if campaigns don’t perform.

Analyze this

Pure pay-for-performance advertising costs retailers even less: except for some integration costs, zero. So the shifting marketplace has been a boon for affiliate networks already using the pay-for-performance model, and they’re drawing in both pure-plays who advertise only online and need to do it inexpensively as well as multi-channel players seeking to expand online while keeping costs down. But today, the most effective affiliate or pay-for-performance programs go beyond simply blasting ads across the entire network to see what sticks.

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“Affiliate networks need management,” says Forrester’s Nail. “Retailers need to know which affiliate sites and which offers are performing well and they need to figure out how to use the customer data they get to target customers. Most companies don’t really have the skill set or the technology in house to do that. The affiliate network providers do a lot of that analysis. It adds value, because you get more performance out of the campaigns when you know what you’re doing.”

Multi-channel retailers can up their online presence offline with such low-cost ploys as printing their URLs on bags, store receipts, or catalog pages. But as a largely pure-play e-retailer without those options, San Francisco-based Zappos.com must depend on online advertising to get out the word about its shoe and accessory site. At the same time, the 2-year old start-up has little on hand to pay for ad campaigns — and zero for campaigns that don’t work.

“We did a lot of different portal and CPM deals in the past, and we still do some of that,” says Zappos.com’s affiliate manager Brook Schaaf. “But a lot of them ended up having a very high customer acquisition cost. Not enough people saw the ads. So we’re pretty cautious with our advertising dollars these days.” A pay-for-performance campaign Zappos launched on affiliate network provider Commission Junction in February 2000 drove sales up by nearly 2,000% in its first eight months. Revenues driven through the program passed the six-figure mark in January, about a year after implementation. Zappos’ banner and text links have been posted by about 8,500 of Commission Junction’s 500,000-member affiliate network, with the text links driving sales four times as high as sales from click-throughs on banners, Schaaf notes. Zappos pays affiliates 15% of each sale, which is on the high end of the commissions scale.

Keep affiliate satisfied

Schaaf, who manages the Commission Junction program full-time, says that besides the sales commissions, Zappos’s only other cost has been a $1,000 set-up fee for integration. Schaaf acknowledges that 15% commission is high—the more typical rate is 4% to 7%. Zappos chooses to pay a higher commission, he says, “because we’re worried about the happiness of good affiliates.” Zappos is more dependent on the success of its online ad spending as it does limited spending offline. Keeping the affiliates happy is also why it chose to work with Commission Junction — the company lets affiliates check their compensation status online and gets the commission checks out monthly. “It’s been a good return on investment for us,” says Schaaf. “It gets us in places we want to be, at a price we can afford.”

That’s music to the ears of Commission Junction CEO and Founder Lex Sisney, who says the company has its roots in the frustration he experienced in a former career working for an online retailer of health and nutrition products. “I was frustrated trying to figure out how to get customers to the site cost effectively,” he says. “Buying banner ads and paying upfront wasn’t a very effective use of our marketing dollars, but there weren’t a lot of alternatives.”

And it wasn’t easy. When pay-for-performance marketing was just emerging, retailers were on their own—they had to build or buy the tracking technology, locate and recruit affiliates to take their ads, track the results, set up and administer an affiliate payment system, and provide customer service. Today, Commission Junction has a roster that includes some 500,000 affiliates. Online advertising services like Avenue A Inc. and DoubleClick Inc. also provide many of the same services surrounding pay-for-performance ad deals. And then there are other affiliate networks such as LinkShare Corp., Be Free Inc. and Performics.

Performics’ Bergin says the company has built onto its affiliate marketing base to help retailers and other customers target their outreach. In the same vein, Bergin notes that Performics has now branched out into search engine optimization. It’s one of the few affiliate networks to offer that service on a performance basis that triggers payments to affiliates when someone clicks through to complete a purchase or other predetermined action.

Women’s apparel retailer Chadwick’s of Boston has been in the catalog business since 1983, but online only more recently. With annual sales estimated at $500 million, the privately held company nevertheless keeps a tight watch on its ad spending to make sure it can stick with the 20% to 50% off store pricing that’s been a key driver of its success over the years. The company selected Performics as an affiliate marketing partner for the program it launched in December. Within the first six months, says Chadwick’s e-commerce manager Neal Patrick, Performics affiliates were delivering nearly 10% of the company’s online sales. Affiliates collect 7% of each sale.

“We wanted to get the program up quickly, and we wanted flexibility,” Patrick says. “Under the agreement, we can run other affiliate programs.” In fact, Chadwick’s also has an affiliate program with Commission Junction. “And it’s monthly, with an easy termination clause so if it was not working out, we could move onto something else,” he says. Since much of the technology to administer the program resides on Performics’ server, implementation required only adding code to the Chadwick’s site for integration. The cost — basically, time for Chadwick’s IT department — was less than $2,000, he estimates.

Is it new-or not?

Part of the value that an affiliate-management provider brings to the ad process is that it helps the advertiser determine which sites to target, then ensures that the affiliates are doing their job. “We rely on the affiliates to make sure that the traffic they deliver is targeted. Performics works one to one with its affiliates to make sure that happens,” Patrick says. “They go out and sell the program to the affiliates. An affiliate has only a finite amount of space and attention to give to a universe of merchants, so Performics’ job is to make sure the right affiliates allocate a higher proportion of their attention to us rather than to someone else.”

Pleased with the numbers, Patrick is nevertheless wrestling with the question of how much business driven through the deal is incremental rather than from customers Chadwick’s already has. “It’s the $100,000 question,” he says, one that other web merchants are trying to figure out as they evaluate such programs. Indeed, it’s a gray area. No universal standard quantifies how many rebuys it takes to make a site visitor into a loyal customer.

“Our clients recognize that the first time someone buys, it doesn’t necessarily make them into a lifetime customer. The acquisition process is longer than one sale,” Bergin says. “There are reasons people defect, and there are places for online service companies like ours that keep bringing them back to a site. In theory our job is to bring the retailer new customers. If the customer starts to type in the URL directly it becomes the marketer’s responsibility to continue to mange that relationship.”

Bottom line: until customers get to that point, online marketers will embrace pay-for-performance deals as a cost effective way to get them there. And as tracking and targeting become more sophisticated to produce even more accountable results, they’ll be doing so in increasing numbers, supporting Forrester’s projections of a boom in online marketing deals over the next three years. “None of our clients has reduced its marketing budget,” Bergin notes. “This economic climate has been a great way to raise the profile of pay-for-performance marketing.”

mary@verticalwebmedia.com