Since it is the time of year that prognosticators attempt to predict the future, let me offer this: Within five years, CPM pricing will account for less than 20% of the total market.
CPM pricing will eventually be relegated to a few hundred sites like WSJ, TechCrunch, and GQ where advertisers are willing to pay for the credibility that comes from associating with these publishing brands.
The rest of us will be forced to sell on performance pricing models.
As humans we are incredibly adept at rationalizing our own thinking. We fall in love with the things we are good at, and find reasons to hate the things we struggle with. The real reason publishers hate CTR, is becausewe are not good at driving clicks. If online display had a 20% CTR, we would all exclusively sell on CPC.
Before you fill my inbox with hate mail, realize that I am not saying that online display advertising does not work. In fact, quite the opposite is true. However, when measured by CTR, we underperform, and advertisers are voting with their wallets.
The truth is in the numbers. A study by PricewaterhouseCoopers found that from 2007 to 2008, CPM-based pricing dropped from a 45% share to a 39% share, while performance-based pricing climbed from 51% to 57%. In 2009, the numbers continue to shift in favor of performance pricing. This is a tough trend to ignore, and as a publisher, you do so at your own peril.
The Problem Started Before the First Online Ad Was Ever
Ironically, CPM pricing started to die with the rise of the CMO into the executive suite.
In the last 20 years, the CMO has come of age. The 4,000 CMO's that belong to the CMO Council represent more than $90 Billion in marketing spend. Marketing was once considered a semi-serious position that often reported to the VP of Sales or CFO, but today CMO's have an equal seat at the executive table. Along with that seat came a new set of responsibilities. They now report directly to a CEO who is going to demand accountability for every dollar spent. The recession only magnifies the problem.
CMO's are a rare breed whose average tenure is shorter than the lease on your car. Fast Company called it "The Most Dangerous Job in Business," and Business Week said that "few CMOs can live up to the sky-high expectations." The average tenure of today's CMO is a mere 28 months.
CEOs keep their jobs by growing the business, and nobody ever appeased Wall Street by pointing to their branding impact. If you sit in the executive suite, your job is to support your CEO. As a result, they are not buying branding, they are buying customers.
It All Boils Down to Risk
The question of whether pricing should be CPM or CPC can be distilled down to one very simple question: Who should take the risk?
CPM is a metric that measures a publisher's success. CPC is a metric that starts to measure advertiser success. In a world where inventory is limited and a few people controlled access to the audience, publishers were able to sell on CPM. Unfortunately, that is no longer our reality and will not be in the future.
There are more than 3 trillion impressions each year that go unsold. As more people around the world go online and Internet usage continues to climb, this number will only increase.
When supply outstrips demand, advertisers have a plethora of options, and are able to demand CPC (or even CPA) pricing.
Luckily, this is not necessarily a bad thing.
Two Roads Diverged in a Yellow Wood
As publishers, we are faced with the biggest challenge of our collective careers, and there are only two options: convince advertisers to buy into a new set of metrics where we excel, or, figure out how to get really good at CPC.
Focusing on new metrics is a huge mistake. We have tried this approach and failed every time, because advertisers are going to buy the model that most directly correlates to driving their revenue. Trying to convince them otherwise is a waste of time and energy. Instead, we need to get great at CPC.
I Chose the Path
Less Traveled By, and That Has Made All the Difference
This is my last column of 2009. I look forward to continuing the conversation after the New Year, and will focus my first column in 2010 on how publishers could make a fortune selling on CPC.
Thank you for all of your compliments, criticism, new ideas, enthusiasm, and most of all, your passion for this industry you have offered me this past year; it has made me better.
I am honored to be a part of this industry.