CPM vs. CPA – which one will survive?
It is well known that online advertising is one the most rapidly growing and changing fields of business nowadays. To be successful, a growing company definitely depends much on the ability to follow trends, predict the nearest future and be flexible in making decisions. It’s art, it’s a curse, it’s a mastery and it’s a headache of every R&D department. Hours of Internet search, blogs, and forums browsing and just thinking over are wasted with the only aim – to find hints on how to be on the top of the business development wave. We are not going to judge any company but would like to perform some base analytics that can add a penny in a generation of opinion about a future business picture of our colleagues.
Today’s thoughts and evaluations cover common business models that are widespread in online advertising. Two big families are performance-based models (CPA) and impression-based model (CPM). Similitude to a performance-based model based on clicks (CPC) goes a bit aside. If you do online advertising, then you’ve already decided to use one or several of those models. Needless to say, a really huge piece of business planning depends on the chosen and trusted model. It is necessary to underline that every analyst has his/her own opinion about “how it was and will be”; we do not intend to impose an opinion. Our only aim is to help some smart but inexperienced guys to think and analyze by themselves without listening to some self-assured lucky idiots that just make money on misinformation.
Ok, how it was and how it is? Everything concerning clicks is like a zombie – dead and alive at the same time. PPC management is a rapidly developing branch, but only in context advertising with search engine titans, like Google or Yandex. It is rather easy to understand why payment for clicks in other types of advertising is already dead, and that fact could be foreseen something like 3 years ago.
Internet of things, a personal assistant with AI, DMP’s knowing what you’ve eaten yesterday morning – all these are buzz words, having one single core – a lazy customer, a user who interferes with an advertisement, does have his/her needs. If you, as an advertiser, want to make money, you should be oriented on user’s needs, predict and satisfy them. They are the only focus. It’s all about performance metrics, and flexible CPA has all the blessings to be the king.
Here comes CPM metrics, which also has a potential to target users’ needs and be successful. Will it be so? Let’s take some example. Imagine a website or an app, in other words just a traffic source. Users visit it, see ads, sometimes click on them and rarely make some leads at advertisers’ landing pages. A publisher who owns that traffic source can have a constant and “smooth” income when selling traffic using CPM model. He/she can have the same income if selling less “smoothly” using CPA model, but, ceteris paribus, his/her income is the same. On the other hand, an advertiser can receive equal campaign performance, both for CPM and CPA, when both are tuned and precisely targeted. Everybody is happy, and there is no difference, isn’t it? Nope, it is not! Try to trust your intuition and try to predict future processes.
Imagine that one day you become a lucky owner of a money-printing machine. Cool stuff! You start printing money and becoming a really rich person. In a long run, the market becomes overfilled with money, and the real value of each new paper becomes smaller. If you own a website or an app and sell traffic at CPM basis, you will want to increase the number of ads at your traffic source, which will increase your income in a short run. At the same time (here is the key point!) users become less attracted with your website (app) when it becomes overloaded with ads. If you sell traffic using CPA model, you will have no sense in adding ads, but struggle to improve the quality of your website (app). Users are lured away to CPA based web resources!
In order to be sure in supposed tendencies to some extent, we have made a research of two hundred websites and apps of different verticals. One-half of the sources monetized their traffic with CPM business model, the other – with CPA or CPI. We decided to analyze the daily audience, its dynamics, and changes during almost the whole lifetime of a traffic source.
Then we made an assumption that the balance in an advertising market does exist, meaning that the publisher with a conversion rate (impression to action) let’s say 0.01% will receive the same amount of money either for 1 conversion or 10,000 impressions. Using the collected data about average payouts with each vertical allowed us to calculate dynamics of income for each website or app owner over time.
Finally, results showed a strong correlation of business model type and webmaster income. CPM-based traffic sources showed a quick rise in a short term: +32% of income in the first third part of a lifetime comparing to CPA. Top of the wave was 17% higher than the CPA’s one. In the middle part of a lifetime slight but firm reduction reflected the “beginning of an end.” White noise at the end of a life cycle with chaotic rises and dropdowns showed convulsion of the traffic source. In comparison, CPA-based web sources showed slow, but constantly rising dynamics in profit for webmaster reaching averagely 42% total lifetime uplift compared to CPM.
Quality (chance of conversion) of the remnant CPM traffic tends to decrease, and this process is unstoppable. The gap in price for CPM and CPA traffic is still widening and accelerates hyperbolically. Sure, there is a customer for each type of goods, but answer this question: Will you buy a cooper knife for 5 cents or a steel one for 1 dollar?
Heads of CPM-based ad-exchanges complain about tons of bots and unfair market players instead of trying to focus on the quality of their inventory. They even try to use complex machine learning algorithms to pick up few quality corns from the mess, but AI’s capabilities are still limited.
For how long will it last and what will online advertising market face in the upcoming year or two? It is high time we acknowledged that advertising future is performance based.
What are your thoughts about how to force publishers to care more about users retention instead of just traffic monetization?