Many advertisers have limited budgets and may not understand the most effective method of advertising. With performance-based advertising plans, they avoid the risk of paying large amounts for advertisements that are ineffective. They pay only for results.
The advertising agency, distributor or publisher assumes the risk, and is therefore motivated to ensure that the advertisement is well-targeted, making best use of the available inventory of advertising space. Electronic media publishers may choose advertisements based on location, time of day, day of week, demographics and performance history, ensuring that they maximize revenue earned from each advertising slot.
The close attention to targeting is intended to minimize the number of irrelevant advertisements presented to consumers. They see advertisements for products and services that are likely interest them. Although consumers often state that advertisements are irritating, in many situations they find the advertisement useful if they are relevant.
Various types of measurable action may be used in charging for performance-based advertising:
Some Internet sites are markets, bringing together buyers and sellers. eBay is a prominent example of a market operating on an auction basis. Other market sites let the vendors set their price. In either model, the market mediates sales and takes a commission - a defined percentage of the sale value. The market is motivated to give a more prominent position to vendors who achieve high sales value. Markets may be seen as a form of performance-based advertising.
Although the Internet introduced the concept of performance-based advertising, it is now spreading into other media.
The mobile telephone is increasingly used as a web browsing device, and can support both pay-per-click and pay-per-call plans. Coupons delivered to the mobile handset can be used to link advertising direct to sales. As consumers start to use their mobile handset as an electronic payment device, it may become practical to establish direct linkage between advertising and purchases. The linkage may be indirect. A consumer may use their mobile phone to scan a barcode on an outdoor advertisement. This loads the advertiser's mobile site onto the phone. When the consumer shortly afterwards goes to the advertiser's store and uses their phone to make a purchase, the linkage can be inferred.
Directory assistance providers are starting to introduce advertising, particularly with "Free DA" services such as the Jingle Networks 1-800-FREE-411, the AT&T 1-800-YELLOWPAGES and the Google 1-800-GOOG-411. The advertiser pays when a caller listens to their advertisement, the equivalent of Internet CPM advertising, when they ask for additional information, or when they place a call.
IPTV promises to eventually combine features of cable television and the Internet. Viewers may see advertisements in a sidebar that are relevant to the show they are watching. They may click on an advertisement to obtain more details, and this action can be measured and used to charge the advertiser.
It is even possible to directly measure the performance of print advertising. The publisher prints a special telephone number in the advertisement, used nowhere else. When a consumer places a call to that number, the call event is recorded and the call is routed to the regular number. The call could only have been generated because of the print advertisement.
A publisher may charge defined prices for performance-based advertising, so much per click or call, but it is common for prices to be set through some form of "bidding" or auction arrangement. The advertiser states how much they are willing to pay for a user action, and the publisher provides feedback on how much other advertisers have offered. The actual amount paid may be lower than the amount bid, for example 1 cent more than the next highest bidder.
A "bidding" plan does not guarantee that the highest bidder will always be presented in the most prominent advertising slot, or will gain the most user actions. The publisher will want to earn the maximum revenue from each advertising slot, and may decide (based on actual results) that a lower bidder is likely to bring more revenue than a higher bidder - they will pay less but be selected more often.
In a competitive market, with many advertisers and many publications, defined prices and bid-based prices are likely to converge on the generally accepted value of an advertising action. This presumably reflects the expected sale value and the profit that will result from the sale. An item like a hotel room or airplane seat that loses all value if not sold may be priced at a higher ratio of sale value than an item like a bag of sand or box of nails that will retain its value over time.
A number of companies provide products or services to help optimize the bidding process, including deciding which keywords the advertiser should bid on and which sites will give best performance.
There is the potential for fraud in performance-based advertising.
Since the user's actions are being measured, there may be some concern of loss of privacy.
The rise of performance-based advertising Article by Brandt Dainow
Performance-Based Advertising: Price and Advertising as Signals of Product Quality Paper by Juan Feng and Jinhong Xie of the University of Florida.
Performance-based Pricing Models in Online Advertising Paper by Yu Jeffrey Hu of Purdue University
The Slow Decline of CPM Advertising? Mark Evens: Analyst viewpoint
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