A Step Back
Much of my writing ultimately focuses on online customer acquisition, The images in this post come from a portion of an hour long presentation I gave covering how a performance-minded marketer views the world of online advertising.
From the days of Colonize, Bonzi, and Treeloot's Punch the Monkey, their predecessors, LowerMyBills and Netblue, to today's large buyers of media on a performance-basis which include companies like Netflix and the flogs, there is a common theme underlying the behavior - risk.
In writing about the space and working in it, it is easy to spend time discussing the models that people employ and not take a step back to analyze what about the marketplace makes it possible.
In The Beginning
When online advertising first began, it was a much simpler time and paralleled how any new media channel evolves. Only a handful of sites and a handful of advertisers existed, i.e. an environment of high transparency where each player has a strong likelihood of knowing the other. This meant spending decisions and prospecting were much more straight forward. A handful of each looked something like this -
Modern Day Complexity
It goes without saying that today's environment is not only complex but continues to grow in its complexity at an astonishing clip. Even in the performance space, it's remarkable to think of new the companies and new sources of inventory that earn millions of dollars but didn't exist in any appreciable way a year go.
The current complexity means incredible opaqueness and difficulty for those with ad inventory to connect with those spending money. It opens the door for a value-added middleman, the ad aggregators.
A discussion on ad aggregators could occupy (and probably will) its own post. There is a distinction in my mind between ad aggregators and brokers. Both act as a middle layer, but brokers offer less value. They have everything to lose by a more transparent world; whereas an true ad aggregator doesn't. They might prefer it or strive for it but their business doesn't go away because of it.
Google is actually an ad aggregator in the online ad world. While they have owned and operated properties, with AdSense, they syndicate their AdWords advertisers onto countless third party properties. That means they also sit in between advertisers and other publishers. More commonly, though, we think of ad networks such as Advertising.com being aggregators, but the group encompasses all types, including the handful of companies that began as media buying for internal products only to expand and use their buying power for outside products.
Understanding Risk
Where things get interesting is that while advertisers and publishers want to connect - one has money, the other wants that money, there is some built in friction that must be overcome. That friction revolves around the risk that each takes based on how they pay / receive compensation. Today, advertisers can pay on three main metrics - views (CPM), clicks (CPC), actions (CPA) - and publishers can receive compensation along the same.
Below is graphic which I first saw used at Advertising.com. It is one of my favorites and despite the changes in the online advertising landscape since I first saw it in 2001, it remains as apt today as it was then. (Fort hose who saw my talk at Startonomics, this might look familiar).
For an advertiser, paying on a cost per thousand basis presents the greatest amount of risk.They know their ad was displayed but that's about it. Advanced targeting and other technologies help allay these concerns, but it still remains the highest level of risk. For a publisher, the exact opposite is true. Getting paid on a per impression basis represents the least amount of risk. They like it not because it's easy money, but it's something under their control. Anything else, means a greater reliance on the advertiser. Jumping to cost per action, it provides the greatest level of risk-reduction to an advertiser, because they know the user not only saw the ad and clicked on it but took something additional step, be it completing a form, a purchase, etc. Yet, for the common publisher, receiving payment for actions presents a daunting prospect, filled with lots of risk and trust. It's no wonder then that cost per click has emerged as a dominant format given that it puts an almost equal burden on both parties.
Arbitrage and The "Route" of Much Evil
The mismatch in risk means that not all parties will find contentment. It's not quite as bad as negotiating peace in the middle East, but sometimes, a publisher and an advertiser simply can't find common ground on which metric to pay or lacks the ability to bridge that gap profitably themselves. That opens the door to those who are willing to take risk and bride the gap between the two side. These risk specialists can scale for many reasons but also because even with the many ad aggregators, the web grows and evolves asynchronously, constantly opening up pockets of opportunity.
The Good: Legitimate companies Tree.com, Adchemy, Education Dynamics, CompareTutors, AllWebLeads, and many more. These companies do a better job than those they serve can. It's a true win-win when done right, because they also help connect users with companies that serve them, ones they wouldn't have necessarily known about on their own. Their credo, "Enabling businesses to connect with users more effectively than on their own."
The Bad: Those willing to take risk can, thanks to complexity, operate a business based on trying to exploit the pockets of inventory not yet served well by ad aggregators. These are our classic arbitragers and the inventors of the flog and its antecedents. Their credo, "Ask not what the user can do for you, but how much the user can make you."
Good vs. Evil
Like the Force, aggregatos aren't inherently bad and arbitrages aren't either. It's how they decide to use their power that separates the good for the bad. While the two sides don't fight directly, they are at odds, because the tactics used by the bad guys threaten the repuation of the good guys. If anything, my experience has shown that the outside world, and this includes those with years of experience in the online, has a harder time distinguishing the good from the bad, and is more and more likely to assoiate performance marketing, aggregation, and arbitrage as solely bad. The bad guys might create some wonderful fodder (it's almost fun to see what they come up with next), but their lack of accountability and money at all cost attitude and the wider ramifications of that, i.e., an entire industry being locked out, is what keeps me up at night.
This is a very good and depth article on the complexities of online marketing. I promote CPA offers quite frequently and I've never really thought of it in the terms that you have laid out.
Posted by: Matt Wolfe | June 09, 2009 at 12:15 PM
You have some of the best posts on online marketing I have ever read anywhere on the web. You help me understand what I'm doing (and why it works) tremendously.
Posted by: Sam | June 10, 2009 at 03:43 PM
Jay, yet another fantastic post on performance marketing! I share a similar view that arbitrageurs are simply profiting from the temporary lack of efficieny and transparency currently available to most advertisers. In some lead-gen markets though, advertisers find a tough time competing against comparison-type sites which are likely to get higher conversion rates (because of the higher value provided), but I guess those sites fall under the affiliate/performance marketer category as opposed to the arbitrageur category.
The money at all cost attitude actually does affect all performance/online marketers... check out this testimonial from a lady named "Julie" who lost money with the Google Money Tree offer which will result in other honest web companies losing her business:
'I, too, got sucked into this and didn’t even realize that the $72.21 was coming out of my bank account until yesterday when my account was overdrawn and I went to investigate. That is when I found that they had been debiting $72.21 from my account for several months. I am an older person worried about retirement and medical expenses. Yes, I should have read all the terms and conditions, but they were long and tedious–lesson learned. I’ve stopped the debit with my bank, filed a dispute claim with my bank, filed a consumer complaint with the FTC, and e-mailed Google Money Tree to stop debiting my account. Will probably never recover the lost money, but at least I’ve done something to try to stop them from taking someone else to the cleaners. Yes, we all should have known better, but we are all worried about our financial futures–that is what scam artists hope for and prey on. Lesson learned? Yes, no more internet deals for me!'
Posted by: Pauly Singh | June 10, 2009 at 05:09 PM