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Debate heats up over online ad pricing

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There’s a huge debate raging in the online ad industry about how to price deals, fueled largely by the declining click-through rate and pressure on advertisers to prove return on investment as they cut marketing budgets.

Coming under fire are cost-per-performance campaigns, including cost-per-action, cost-per-acquisition and even the longstanding cost-per-click, as publishers hurt by the economy fight to keep the cost-per-impression model dominant.

The Interactive Advertising Bureau, in last month’s "Internet Advertising Revenue Report," estimates that half of all Internet ad deals are based on the cost-per-thousand model, up from 43% last year, even though performance-based pricing was supposedly building steam because of the demand for more tangible return on investment. In fact, cost-per-performance campaigns remained stagnant, representing 10% of all deals, while hybrid deals accounted for 40% of all deals, down from 47% last year.

Performance-based deals riskier

Most publishers and ad networks are opposed to performance-based deals because they’re riskier. Cost-per-impression deals are straight buys, where cost-per-performance deals depend on user action, whether that’s clicking, buying, filling out a survey or some other metric.

However, with much more inventory available due to declining ad sales, some media buyers say they have recently been able to negotiate more performance-based deals than they were before.

Mark Stephens, director-media services at Lot21, San Francisco, said he’s done cost-per-acquisition deals with both Yahoo! Inc. and Winstar Interactive Media, an ad network that represents major sites such as Fodors.com, Kiplinger.com, uBid.com and Entrepreneur.com.

However, the networks still aren’t keen on the new model.

On Oct. 6, Winstar Interactive and its sister network Cybereps, both owned by Interep Interactive Inc., stopped accepting cost-per-action deals unless the advertiser guaranteed cash payment to the ad networks and the sites represented.

"Our sites do not want this business," said Winstar Interactive President and Interep Interactive COO John Durham, in a statement announcing the new policy. "This is not advertising, this is outright thievery."

Different models can work

ValueClick Inc., one of the premier performance-based networks, got its start in 1997 as an exclusively cost-per-click network. Beginning last year, it started introducing new pricing models, including cost-per-lead and cost-per-action, depending on the advertiser’s business objectives.

"There is no one model that is the best driver for your business," said Elise Arthurs, ValueClick’s VP-worldwide marketing. "We have to sit down with an advertiser and figure out what they want, including getting scale." Arthurs said pricing is driven largely by publishers, many of whom insist on straight CPM deals, so ValueClick will work the math backwards, sometimes calculating cost-per-click based on the CPM rate demanded by the site.

However, sometimes this backfires. "We’ll have CPC campaigns with an awful click-through rate, so the effective CPM is 10 cents," said David Yovanno, executive VP-sales and marketing for ValueClick.

Chances are, no publisher will accept that rate, no matter how bad the economy gets.

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