Commentary

Will CPA Become the Default Pricing Model for Paid Search?

Yesterday I spoke on a panel titled "Search Engine Pricing: Click vs. Action" at the Digital Media Measurement and Pricing Summit. Unfortunately, my Search Insider deadline was prior to the session, so I'm not able to share the outcome. Nonetheless, I think the topic makes good column fodder.

Shortest Panel Ever?

The session was billed as a discussion about the various pricing models used for paid search. More specifically, the focus was on the potential for CPA (cost-per-acquisition) to become the default format for buying/selling paid search ads.

I have to admit, when I was first presented with the topic, I thought to myself, "This will be the shortest panel ever." I couldn't think of anything to contribute beyond, "CPA? Never gonna happen."

As I procrastinated on preparing for the session, I came up with some other topics that could vie for the "Shortest Panel Ever" award:

-          Black Hat SEOs Share Tips for Creating User-Friendly Site Content

-          Advertising Tactics Deployed by Google to Create Consumer Awareness

-          Successfully Monetizing Facebook: Case Studies

-          Barry Diller Keynote: Proven Strategies for Gaining Search Market Share

Inspiration, Move Me Brightly

As is oftenthecase, fellow Search Insider Mark Simon sparked some thoughts and helped me formulate a POV. In a recent column, Mark speculated that the purchases of DoubleClick by Google, Atlas by Microsoft, and Right Media by Yahoo will lead to "insider data trading." He suspects that search engines, armed with data showing what marketers are paying for search ads on other networks, will artificially inflate their minimum keyword bids.

Personally, I don't think the Big 3 would go that route. They have too much to lose if they get caught -- not to mention their search platforms are plenty profitable with an open marketplace dictating rates. That said, CPA pricing would eliminate many concerns over one of the biggest conflicts-of-interest pervading these acquisitions -- search engines owning marketer's conversion data.

CPA (Cure for Potential Abuse)

As long as paid search is priced on a CPC basis, the potential exists for the type of price-fixing Mark suggests.  However, if marketers only paid for actual conversions, it wouldn't matter what the engines set their rates at. In the CPA model, marketers define what they are willing to pay for a specific conversion activity and (presumably) bid to the threshold of profitability.

Let's explore the ramifications of CPA on the core constituents of the search ecosystem...

1.       Marketers. CPA minimizes the risk involved with buying media on a CPM or CPC basis and makes it easier to project results. And for those brand marketers who aren't looking to drive a direct conversion or sale, the "A" in CPA could be defined as any valuable consumer action -- registration, video view, store locator, or even the original click.

Another tangible benefit of CPA to marketers would be the end of click fraud as we know it. With publishers no longer being compensated for clicks, there would be no incentive for rogues to artificially inflate click volume. Now, it's possible "action fraud" might emerge as the bad guys deploy humans or bots to complete various activities beyond the click but, assuming the action each marketer is paying for is not made public, this would prove to be a very tedious endeavor.

2.       Consumers. From a consumer standpoint, a CPA platform should lead to more targeted ads on SERPs as well as richer post-click experiences. As the engines tweak their quality scores to give more weight to landing pages and click-paths, they will prioritize ads that "convert" at a strong clip -- or have a high-enough bid price to cover a poor conversion rate. Either way, the result will be fewer and fewer affiliates and made-for-AdSense sites appearing on the SERPs.

3.       Search Engines. There's a reason more and more budget is being poured into search each year. It's because search works. And by "works," I don't mean it drives clicks. It drives actions -- meaningful actions that bring value to brands. Today, only the marketer profits from these actions. Assuming marketers are continually investing in search because the value of the actions outweighs the cost of the clicks, the engines are not being compensated for the full value they are delivering. In addition, with marketers bidding on different actions for the same keyword, the engines' effective CPM is likely to increase.

Will CPA Get its Day?

There are a couple macro trends that lead me to believe a move to CPA might be in the cards. The first is consolidation in the space. For the first time, each of the Big 3 owns reputable ad serving technology. Not only does this provide access to conversion activity, but it delivers more reliable data that marketers will accept for billing purposes. The second is a movement toward transparency that's pervading all facets of the marketing landscape. The inherent conflicts within GoogleClick, MicQuantive, and YahRightMedia demand a level of transparency heretofore unseen in the search space. There is simply no more transparent pricing model than CPA.

I've clearly only scratched the surface here on the primary drivers behind CPA and the implications if it becomes the default model for paid search. And I've focused mostly on the benefits of CPA to the ecosystem. It is certainly worth exploring the downside -- namely, the potential for marginalizing agencies and the challenges some marketers might encounter achieving scale.

Hopefully, my panel will have fleshed this topic out a bit further and, assuming that's the case, I'll continue down this path in my next column. If, however, it turns out to be the "Shortest Panel Ever," I'll forget all about the letters CPA -- until April 15th, that is!

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