Measuring cost per action advertising

In the first article in this series, I suggested changing the pricing of advertising campaigns based on impressions to pricing them based on the number of clicks. And in the second article, I went a little bit further and argued that it might be even better to agree on a cost per action pricing scheme.

If an advertiser is considering ending an impression based or click based advertising campaign, a publisher could try to turn the relationship into a partnership by offering CPA (cost per action) advertising. In that scenario, the site publisher will get paid for a specifically defined outcome that the advertiser is aiming for.

I think many people know the phenomenon of ‘affiliate marketing’. Programs like Amazon Associates are a very good example. The publisher sends people to Amazon’s website, where they can buy a product. The publisher gets a percentage of the sale, which varies depending on the product category. This is actually a win-win scenario for the publisher and for Amazon. The publisher doesn’t have to convince Amazon to run an advertising campaign on her site. Instead, it’s as simple as applying for the program and placing the links or graphical elements on the site. For Amazon, it’s very efficient as well, because they don’t have to pay any upfront advertising, they only have to pay when the desired result occurs, i.e. the sale of a book, DVD or any of the millions of other products they have on offer.

In the online advertising industry, every time a site visitor becomes a buyer, we call that a ‘conversion’. And if the outcome is a subscription to an e-mail newsletter, a membership to a website, or just a lead, that’s also called a conversion.

For the publisher, the only limit is the number of buying customers sent to Amazon. And for Amazon, strange as it may sound, the more the have to pay the publisher, the happier they are, because they’ve sold more than without the publishers help.

There are numerous affiliate marketing companies. However, for a business there are costs involved in joining them. As a publisher, your advertiser might be just too small or too specialized to join any of those companies. And not always is the desired result a sale.

Most modern ad servers have the ability to measure conversions. For instance, the open source ad server OpenX has a feature called ‘trackers’. The typical work flow is like this:

  • A person visits a website and sees an ad for a product or service she likes. That is called an impression.
  • When the visitor clicks the ad, she is taken to the advertiser’s website. That click is also counted.
  • On the advertiser’s website, she then buys the product that was promoted. At the very end of the sales process, the transaction is recorded by means of an invisible tracking code. This code sends a signal back to the ad server reporting the occurrence of the sale, typically including the total value of the transaction. That’s called a conversion.
  • The ad server will then link that conversion to the impression and click that started it all.

In most ad server, there are four basis elements that can be reported: number of impressions, number of clicks, number of sales, and sales value. The publisher and the advertiser must agree, preferably upfront, how the publisher should be compensated. One scenario is that the advertiser will pay a fixed amount for every sale. Another scenario is that the publisher gets a percentage of the sales. Combinations of the two are also an option.

The math involved in cost per action campaigns is simple and sometimes sobering:

  • From 100,000 impressions, typically only 200 or so clicks occur. The CTR (click through ratio) is 200 divided by 100,000 equals 0,2%.
  • These 200 clicks result in maybe only 5 sales.
  • If the average sales value is $15 and the publisher gets a 5% commission, those initial 100,000 impressions will pay out $3.75.
  • The eCPM for this deal is then $3.75 divided by 100, equals $0.0375.

Of course, the parameters in this equation could be very different. Let’s assume a publisher is displaying affiliate ads for rental cars. The number of transactions might still be just as low as 5 out of every 100,000 impressions, but the transaction value could be a lot higher than $15, maybe even $500. Still using a 5% commission, the payout to the publisher is $125, resulting in an eCPM of $1.25.

The ability to link the sales back to the impressions is important for publishers. It allows them to calculate how much affiliate revenue they’re getting for every 1,000 impressions. The outcome is often referred to as ‘eCPM’, or ‘earned cost per thousand’. That number can them be compared with other affiliate programs, or with more traditional advertising programs. After all, it wouldn’t be smart to run an affiliate campaign that looks good on paper but actually pays less than other campaigns.

For advertisers, it is also important to keep a close eye on that eCPM their publishers are getting. Having it too low will mean publishers will start looking for other opportunities. Having it too high means they’re paying more than they should (publishers won’t mind that of course).

As a publisher, stepping into affiliate marketing with your (former) advertisers effectively means risk reversal. The advertiser might not be willing anymore to pay up front for an uncertain outcome. Allowing them to pay for their desired result just might make the difference, especially in a climate of shrinking marketing budgets but increasing focus on sales efforts.

This completes the route that publishers and advertisers can travel together from a traditional display advertising relationship into the partnership called affiliate marketing.