Marketing: Only performance counts

As Wall Street waits to see who survives the obliteration of electronic merchants trying to sell stuff to consumers over the Web, it's fair to project that only creative and cut-to-the-chase outfits will survive the cluttered world of online marketing.

It's no longer enough to blow $30 million on a cute campaign in hopes that revenue will follow. If we're learning anything in business-to-consumer marketing, it's that online consumers rule; their online decision processes change rapidly; and the focus must be on cost-effective ways to gain customers. Online marketers must not only gain customers, but measure exact performance of marketing methods.

The key to creating return-on-investment (ROI) lies in the Net's inherent interactivity between consumer and merchant, and a new marketing strategy that every advertiser should be begging for - call it CPA, the cost-per-action pricing model.

Consider the world of online marketing as it has evolved: In the early days of the Net, the traditional TV/radio model was transferred online - the advertiser paid a Web site X amount of dollars for X number of impressions. And so the cost-per-thousand, or CPM, model was born.

Just like in television or radio, the poor advertiser paid regardless of how many people saw the ads - and too bad if the banner happened to land at the bottom of the page.

Today, the only way the CPM model makes sense is for building or maintaining a brand, which can be extremely expensive.

Take Yahoo!, for example. An advertiser on Yahoo! can spend as much as $75 per thousand, depending on the target audience.

According to Forrester Research, banner ads were 40 percent effective in 1994. By 1998, they dropped to 1.5 percent effective. Today, banner ads are just 0.5 percent effective.

Clicks didn't click

Following the CPM, the cost-per-click (CPC) model was born and, for the first time, online marketers were able to pay only for consumers who saw the banners and actually did something about it. Advertisers could sleep a little better knowing that consumers were clicking their ads.

But clicks don't necessarily translate into purchases. Forrester estimates that the $1.5 billion spent on Internet advertising in 1998 will increase to $17.2 billion by 2003. Clearly, a lot of money is being thrown into finding successful solutions for online advertising.
The Net reminds us once again that we are using only a small percent of its brain. The Web was meant to support sophisticated models.

"The online world is all about doing things that aren't possible in the physical world," says Steve Dow, a partner at leading venture capital firm Sevin Rosen Funds. "When we look at companies in this space, we want to see forward-thinking companies with ideas - like pay-for-performance - which leverage the benefits of the Internet and where everyone wins the game."

So what's the next step?

Pay for performance. Companies like Register Once.com and ValueClick are giving marketers what they crave. Advertisers pay only when a desired action takes place - a product is purchased, software is installed or a registration is captured. This is a fantastic idea, but very few suppliers are willing to cooperate. With more than 50 percent of all online ad inventory going unsold, who can explain it?

Shea Park, president and founder of Ad-Spark.com, a company specializing in media buying, has felt the shift toward pay-for-performance, or CPAs since January 1999. "My experience is that there are unlimited advertisers seeking action-based marketing," Park says. "The demand far outweighs the supply. There just aren't enough companies willing to provide CPA deals."

Forrester estimates that only 15 percent of all online media purchases are performance-based agreements.

If you browse the Web, you'll find some heavyweight companies involved in performance marketing. Dell Computer has one of the largest programs, paying affiliated Web sites a 1 percent commission for sales. BeFree and Linkexchange.com, a Microsoft subsidiary, also run third-party affiliate sites that have proven successful. Mytalk.com, a service that allows users to access e-mail and voice messages via the phone, is a member of LinkShare.com, one of the premier companies in this arena. Speedyclick.com and Hotbar.com are other examples of affiliate programs.

Many of these companies establish affiliation through exchanging placement on other host sites and promotion to those member bases with bounties paid for purchases made through a link or referral.

By 2004, Forrester predicts 53 percent of U.S. online spending will be based on performance models. With plenty of ad inventory and ROI measurement tools, marketers will need to insist on CPA distribution. Savvy marketers know the future belongs to online consumers who provide feedback that will continually shape marketing techniques and tools.

So suppliers, beware - if you're not offering CPA you may soon be receiving CPR.

Lance Cunningham is co-founder and chief executive of iChoose, a Dallas-based company that provides free shopping software to online consumers. He can be reached at lance@ichoose.com