Switching from pay per view to pay per click
In the past few weeks, I’ve talked to a number of publishers who had a remarkably similar story: advertisers are starting to cut their ad budgets, and as a result site owners see their ad revenue decline. Whether or not it is a good idea to reduce advertising budgets is not my call, only time will tell. But for site publishers, it’s a real problem.
In a series of articles, I’ll present steps publishers can take to act on this trend. You’ll see that the overall strategy is to reduce the risk for advertisers and to find ways of adding more value than just offering display advertising. In this first part, I will discuss switching from CPM to CPC campaigns (I’ll explain these terms below).
According to the publishers I talked to, most of the campaigns that were terminated were based on a monthly tenancy or a CPM contract. CPM means ‘cost per mille’, where the advertiser pays a fixed amount for every 1,000 ad impressions on the publisher’s site. That’s understandable. An advertiser looking to reduce his ad spending has an easy choice here. It’s an out of pocket cost, with no direct or measurable result. Strange as it might sound, this is both the reason but also the solution for this problem.
Let’s face it, an advertiser isn’t really running ads on a site because they like the site or the site’s owner (actually, they may like the site and the publisher a lot, but it’s a business decision to run advertising or not). No, what an advertiser wants are results. They are trying to get people to visit their site or business and then buy their products and services.
So as a site owner you might want to contact the advertiser, and make them a proposal that is based on results, not just on input. Using a modern ad management system allows you to measure and manage ad campaigns on numbers of clicks, not just ad impressions. It’s all about changing the focus from selling ad space to delivering potential buyers. And at the same time you should focus on taking the risk away for the advertiser.
Your advertisers usually have a pretty good idea about how effective they are in turning a visitor into a buyer. Let’s say that they can sell a product to 1 in every 100 of the people visiting their site. That’s called the conversion rate, in this example it’s 1%. In other words, every single visitor you send to their site contributes 1% of all sales that originate from clicks on your site. It’s only reasonable to assign a financial value to these clicks. After all, without them those sales wouldn’t have happened in the first place. The hard part is agreeing on what a reasonable compensation for the site owner would be. In some markets, it’s not that hard, the margins are well known. In other markets, it requires a bit of openness and trust between the two parties.
When the advertiser makes 5 dollars net profit on a single sale, every visitor contributes 1% or 5 cents to that net profit (for our fictional scenario). The site owner and the advertiser might come to an agreement to split that, so each gets half. In terms of the ad campaign, this comes down to 2.5 cents per click. That’s where the term cost per click, or CPC, comes from.
By switching from display advertising to pay per click advertising, you’re becoming more than just a publisher. The site owner and the advertiser are stepping into a partnership which a shared interest: both will benefit from sending as many new visitors as possible to the advertiser’s site. There is little risk for the advertiser, they’re only paying for clicks and their ability to turn visitors into buyers becomes the key factor. As a publisher you might think it’s a bad deal compared to CPM campaigns. However, since you had lost those CPM campaigns already, this is better than not having the campaign at all.
It’s not always this simple, for instance the advertiser’s sales value might vary widely per transaction, or the conversion rate might not be as easy to predict. In the next part of this series I will discuss how you can still offer performance based advertising in that scenario.