How do you get 'em to buy?

Arun Natarajan

WEB publishers have a problem. While the number of page views on their Web sites has multiplied several folds, online advertising, though growing, is not keeping pace.

In fact, according to industry estimates, all the major portal sites are currently able to sell just 8-9 per cent of their advertising inventory.

The solution to this supply-demand mismatch would seem obvious to experienced business folks: stimulate demand by reducing rates.

For example, a cut in interest rates encourages more people to take loans to buy cars and homes; something that hard data shows happened over the last few months in the US - despite September 11.

However, for some strange reason, Web publishers have not bought into this logic - yet. They are clinging on to an ''official'' advertising rate of Rs 200 CPM. (A Rs 200 CPM means that advertisers pay Rs 200 for every 1000 times their ''banner ad'' is viewed by visitors to a Web site).

Several deals are indeed happening at significant discounts to this official rate. But, the point is that mere discounts are not enough. The official rate itself needs to be brought down radically - to at least a tenth of today's rate. Read on to know why.

The CPA threat

A major threat facing the online publishing industry is that rather than focussing on developing more useful content and services for their users, Web publishers are being forced to turn into commission-based superstores. This is happening due to the rapid ascendance of the Performance-based or Cost Per Action (CPA) model of online advertising. In CPA advertising, Web publishers get paid only when advertisements displayed on their properties elicit an action from the viewer - either by clicking on a banner or filling a form or actually purchasing a product online.

''There is a marked shift in the percentage of ad spending going into pay-for-performance buys,'' says market research firm Jupiter Media Metrix (JMM).

According to Forrester Research, by 2004, half of all online advertising will be performance-based and pure CPM deals will decline to less than 20 per cent by 2003. (CPA buys currently represent 22 per cent of online ad spending, according to JMM figures.)

The ascendance of CPA means that publishers, instead of ensuring that ad messages are viewed by their users while consuming content, will now have to focus their energies on somehow making sure the visitors actually sign up to buy the various products being advertised.

Pure CPA deals have already started making their impact felt right here in India. For example, a leading foreign bank operating here pays Web publishers - for its credit cards and NRI accounts - only when visitors to their sites sign up to buy the bank's products. Under this deal, getting an NRI visitor to sign up for a bank account would fetch the publisher Rs 250.

While such deals might be good for small and medium publishers, large Web sites that serve several million page views each month consider it insulting to accept such deals. However, in the current poor economic climate, most large sites have begun to accept such deals.

''CPA deals are a sign of desperation, but these are clearly desperate times,'' says an executive at a leading Web site. The large sites are rationalising their acceptance of CPA deals by considering them as a means to utilise their ''excess ad inventory'' - i.e., inventory for which they are unable to obtain CPM deals.

Industry observers, however, feel that this not a healthy trend even for large sites. Patrick Keane, an analyst with JMM, says in the Industry Standard: ''This (CPA deals) is an interim solution predicated on sites not being able to sell inventory. Long-term, that kind of business model will kill publishers.''

New economics

To compare the economics of online ad campaign under the CPA and CPM models, let us take the case of a leading Indian portal that delivers about 40 million ad impressions each month for the foreign bank mentioned above. (''Impressions'' refer to the number of times an ad is displayed during the campaign).

On a good month, these ads generate 1600 quantifiable leads - i.e., 1600 NRIs fill up the bank's online form on the portal. The bank, therefore, pays the portal a maximum of Rs 4 lakh per month (Rs 1600X250).

Since this is a pure CPA deal, the portal gets nothing for the number of impressions it serves for delivering these results, even though several of its visitors might view the bank's ad on its site, but choose to visit the bank's Web site directly at a later point.

If the same campaign were to operate under a pure CPM environment, at a Rs 200 CPM, the bank would have to pay the portal Rs 80 lakh per month! At 20 times its outgo under the CPA model, there is no way the bank would consider such an offer.

However, if the portal were to reduce its CPM rate to Rs 20 CPM, the bank's monthly bill would come down to Rs 8 lakh (for the same number of impressions). The bank would presumably consider such a deal - especially, if this portal and other large sites are not willing to accept CPA deals any longer!

Please note: The attempt here is not to encourage publishers to care less about the effectiveness of advertisements on their properties. The point is to distinguish between the responsibilities of a publisher and those of the client's sales team.

A publisher's core task is to create content and services that attract an audience whose demographics are attractive to advertisers. Publishers are also definitely responsible for ''leading the horse to the water'' (making sure visitors view the ads) but ''making the horse drink'' (actual purchase of the product) is the job of the advertiser and its ad agency. Converting content Web sites into commission-based online malls will not be in anyone's long-term interest.

Growing the pie

An important impact of reducing CPM rates will be the entry of a slew of new advertisers - especially small businesses and entrepreneurial ventures - to the online medium. For these companies, online advertising at the current rates is not a viable option at all.

As an illustration, consider the case of a small business owner who has just put up a Web site through which he can accept online orders. According to his business plan, he would need to sign up 10,000 customers to break even on his online operation.

The owner first experiments by purchasing an ad in a neighbourhood newspaper. This ad, which costs him Rs 1000, fetches a total of 50 customers. Thus, the owner concludes that his average cost of customer acquisition through this route to be Rs 20. He now considers promoting his Web site through an online city portal.

Let us find out how the economics of online advertising work out for this potential advertiser. Based on industry data, it is safe to assume that a well-designed and targeted ad would get 2 per cent of visitors to click on it and visit the small business' Web site and of those, 10 per cent would make purchases. Combining these figures with the current CPM rate of Rs 200, the small business owner would need to spend Rs 10 lakh for acquiring 10,000 customers through the online route. This translates to an average cost per customer of Rs 100, which is five times that with local newspapers. Any guess which medium he would prefer?

However, at Rs 20 CPM, the cost of customer acquisition becomes Rs 10 - a figure that would certainly tempt this and hundreds of other small business owners.

Opening the medium to more advertisers will help large Web sites sell a far higher portion of their inventory than they do currently. This, in turn, would encourage them to add newer content and services that would fetch them even more audience. This possibility of a ''win-win-win'' situation - for Net users, publishers and advertisers - should be a powerful incentive for the industry to give lower rates a try.

The author is a Partner at Arun Enterprises, a Chennai-based strategic consulting firm. He welcomes feedback at arun@theoffice.net

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