• by Alex Rampell , January 18, 2010

If the old saying (usually credited to Ralph Waldo Emerson) about inventors and mousetraps were updated for online advertising in 2010, it would read something like this: "Build the right mousetrap, and only the highest-quality customers will beat a path to your door." In the early days of the Internet, advertising was about eyeballs, and advertisers were imitating the mass-market tactics used by their broadcast and print forebears. But breakthroughs in analytics have shed light on the quality of online traffic, changing the focus from lead quantity to lead quality. After all, what good are impressions if they're seen by the wrong people?

 

Google built its AdWords model to address this very notion; keywords are priced based on their demand in the marketplace.  In addition to testing different price points, advertisers can test different words, effectively targeting different users to see which ones produce the best conversions.  This is a useful model because advertisers are paying closer to what a customer is actually worth, but it's still a crapshoot: virtually every customer has a different lifetime value, and hence advertisers find themselves paying based on averages. An online seller of tennis balls might find that some of its customers are worth $3 and some are worth $300, even though each customer was searching for the same keyword  -- "tennis balls"  -- on Google. 

Having advertisers pay based on the number of eyeballs, clicks or acquisitions (preceding terms ordered by increasing measurability) is still suboptimal, as there is no real measure of "quality" built in. With standard Cost Per Acquisition (CPA), Cost Per Mille [Impressions] (CPM), and Cost Per Click (CPC) models, advertisers pay the same price for every broadly identified lead/impression/click, regardless of the lifetime value of the customer.

What if advertisers only paid for ads that brought paying customers?  And, what if advertisers were able to pay more for the good customers and less for the bad ones?

It's time for an online advertising model that, like Google's AdWords, takes advantage of new optimization technologies to provide easily measurable results for the right metrics: how do I get the right customer, and only the right customer, and how much does it cost?

PPQ: Pay-Per Quality

It's time to "pay for quality." In the offline world, advertising agencies are exploring pay-for-performance models (see this recent article from The Economist for more details) as a means to prove their value, but some are wary: "Some agency executives are skeptical about being paid for value, because it is so subjective."

But in the online advertising world, where transactions can be easily measured and traced through a series of mouse clicks, paying for performance or quality absolutely makes sense. There are online platforms now that can identify which traffic sources supply the most valuable customers, optimize the traffic for each advertising offer and adjust the advertiser's costs based on the quality of the lead. Using this new Pay Per Quality (PPQ) model, advertisers pay the right price for every lead by analyzing a customer's total lifetime value.  

PPQ In Action: Alternative Payments and Online Advertising

The first implementations of PPQ advertising have been in conjunction with ad-supported payment systems. Increasingly, online retailers are embracing alternative payment systems like PayPal and Bill Me Later to help reduce shopping card abandonment by streamlining the payment process. Other alternative payment platforms merge advertising and payments with "ad-supported payment systems." In this scenario, customers "pay" for Retailer A's item (in fact, they get it for free) at checkout when they complete an offer presented from Advertiser B. These offers from advertisers are highly contextual and can be targeted for each customer based on a variety of criteria.

On the surface, the benefits to customers (a free product, service or gift card with their purchase), retailers (increase their customers' willingness to pay and make more sales without expensive processing fees) and advertisers (highly targeted leads with a high lifetime value) are obvious.

But digging a little deeper, you can see that advertisers are actually paying for quality rather than quantity -- as certain alternative payment platforms use optimization technology to present the right ads at the right time and price leads on a pay-for-performance basis. Some alternative payment platforms include intelligence that recognizes that each customer is worth a different value.  Advertisers then work directly with these payment providers to identify which traffic sources supply the most valuable customers, and the payment provider adjusts the advertiser's acquisition costs based on this "quality" data.

These trendsetting advertisers are closer than ever to their industry's Holy Grail: paying only for ads that lead to high-quality customers.