Eyeblaster Research Note Cpc Curtail The Growth Display Advertising


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Eyeblaster Research Note Cpc Curtail The Growth Display Advertising

  1. 1. Eyeblaster Research Note The Impact of CPC on the Growth of Display Advertising Copyright © 2010 Eyeblaster, Inc. All rights reserved.
  2. 2. While 63% of publishers price display advertising using CPM, 30% of publishers now use CPC, according to a survey by Econsultancy and the Rubicom Project cited by eMarketer in December 2009. JP Morgan notes that in the past 5 years, performance based display advertising, such as CPC, gained market share over the CPM based models. The report projects that in a recession environment, spread of performance based models is likely to accelerate, as advertisers place a higher value on a clear ROI. In CPM, or Cost per Mille, the advertiser is charged a fixed amount for every one thousand impressions. CPC, or Cost per Click, is a pay per performance scheme, in which the advertiser is charged only for clicks. CPC became popular in the world of search marketing, where advertisers are charged only when a keyword is clicked and not when it is presented. Nevertheless, there is a distinct difference between display advertising and search marketing—the creative. In display advertising, the creative plays a crucial part in convincing users to click on an ad. While some may argue that publishers should be paid according to their ability to generate clicks, publishers only carry a partial responsibility for the generation of a click. The CTR is also affected by the vertical, ad size, format and particularly the ingenuity of the creative. Thus, when publishers are paid by the click, their compensation is at the mercy of others in the advertising chain who make decisions that affect the success of the campaign. Another concern is whether clicks are the proper metric for discerning the success of a campaign. In many verticals, the actual purchase is made in off-line stores, and therefore the value of the ad is in its retention rather than the click. On the face of it, CPC sounds like a far better scheme for advertisers— publishers only “eat what they kill”, and therefore share the risk with the advertiser and marketer. This research argues that CPC payment schemes are not only impaired because of inequitable allocation of incentive and risk, but also that the spread of CPC may curtail the growth of the display advertising industry. In addition, by linking publishers’ pay with success that they have only partial influence on, CPC may drive some publishers out of business, causing an increase in media prices and as a result driving some advertisers out of the market as well. Research Note | CPC will Curtail the Growth of Display Advertising Page 2 Copyright © 2010 Eyeblaster, Inc. All rights reserved.
  3. 3. Impressions and Effective CPM for Standard Banners 12 $12 Average CTR 10 $10 Impressions (Billions) 8 $8 Effective CPM 6 $6 4 $4 Average CPM 2 $2 0 $0 0.01% 0.03% 0.05% 0.07% 0.09% 0.11% 0.13% 0.15% 0.17% 0.19% 0.21% 0.23% 0.25% 0.27% 0.29% 0.31% 0.33% 0.35% 0.37% 0.39% 0.41% 0.43% 0.45% 0.47% 0.49% Click Through Rate Effective CPM Impressions Source: Eyeblaster Research. Data: Q4 2008 to Q3 2009, Standard Banners, worldwide. The chart above depicts the standard banners market by different levels of CTR. The orange line is the total number of impressions by CTR. The green line represents the effective CPM that publishers would charge in order to break even if fees were denominated in a CPC scheme. We assumed, for the sake of this illustration, that the average CPM in Standard Banners is $2. As the average CTR for standard banners is 0.09%, publishers can charge the equivalent of a CPM in the form of CPC, which is $2.24 per click (CPM divided by CTR). The green line is what publishers will have to charge in order to generate the same revenue in a CPC model that they currently generate through a CPM model; essentially they would have to charge more from campaigns with higher than average CTR and lower CPM from campaigns with lower than average CTR. So what would happen to the display advertising market if payment would switch primarily to CPC schemes? One possibility is that publishers would let advertisers and marketers choose whether they would like to use a CPC or CPM. Clearly, advertisers that expect their campaign to underperform would choose CPC, while those who expect their campaign to outperform would choose CPM (known in economics as moral hazard). Thus, publishers will lose revenue from underperforming campaigns and will not be able to recoup it from outperforming campaigns. A second option is that publishers charge fees only using a CPC scheme. Then, about 73% of the impressions in the market that achieve lower than average CTR, would pay less for the media in Research Note | CPC will Curtail the Growth of Display Advertising Page 3 Copyright © 2010 Eyeblaster, Inc. All rights reserved.
  4. 4. their campaigns. The other 27% will pay more—a lot more. The effective CPM that would be charged may reach close to $12. This would have a devastating effect on publishers. Publishers will get significantly lower pay from campaigns with below average CTR. As for campaigns with high CTR, when effective CPM reaches high levels, marketers and advertisers are likely to run out of budget and cut back on impressions. Thus, again, publishers will not be able to recoup their revenue from the underperforming campaigns with fees from the outperforming campaigns. In both scenarios analyzed here, publishers will lose revenue using CPC. Thus two effects are likely to happen. First, lower revenues may drive some publishers out of business, and reduce the media inventory. With reduced inventories, publishers will increase the price per CPC, which would drive some campaigns to other channels. These two effects may inflict serious damage on the prospects for growth of the online advertising industry in the future. It is true that CPC works well in search. However, search is a very different market than display. Search has very few large players, which excludes it from the definition of a competitive market. Also, the availability of desirable keywords is limited, and thus allows for a bidding process to take place. Placements in display advertising are more interchangeable, and therefore the supply of premium spots is significantly more elastic. At the end of the day, for display advertising, what may sound like an attractive proposition in the short run, can do an irreparable damage to the industry in the long run. Research Note | CPC will Curtail the Growth of Display Advertising Page 4 Copyright © 2010 Eyeblaster, Inc. All rights reserved.