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August 11, 2009

Performance Pricing Models: What Every CMO Must Know!

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Performance Based Pricing

For our final session of the day, let’s venture into the space of search marketing attribution and performance pricing models. Our moderator is Andy Atkins-Krüger, Managing Director of WebCertain Global Ltd. Our presenters are:

  • Paul Wilson, Chief Revenue Officer, iProspect
  • Andrew Beckman, President, Location3 Media
  • Vivek Bhargava, Managing Director, Communicate 2

The apples to oranges pricing comparisons of Internet marketing (a conundrum broached in a conversation I previously had with Richard Zwicky of analytics provider Enquisite) has so far been an unsolved mystery. Let’s see what our speakers will do to shed light on the issue.

My battery is on the dangerous side of low, so we’ll see what I can manage to report here.

Andy takes the podium and says that the doors are going to be closed in a few minutes and that there should be no tweeting or blogging so that the audience can soak up and process the info. I’m sure he’s talking about everyone but me, right?

Paul is up first and asks for a show of hands of marketers in the room. More than half the audience raised their hand. Now he asks if anyone’s been to a NASCAR race. This time only three or four hands go up. He says that like NASCAR, performance based pricing is a team effort.

There are pros and cons to performance based pricing models vs. standard fee models and percentage of spend models.

Pros:

  • Aligns goals
  • Incent partner
  • Maximize performance
  • Protection against non-performance

Cons:

  • Constant monitoring of goals
  • Accurate tracking data
  • Goals change
  • SEO vs. Paid
  • Over or under performance

The first two cons in the list will probably happen anyway. The others are a little more complicated.

When creating a performance model, there are some different ways to do this:

  • Bonus targets
  • Incremental fees
  • Percentage of revenue

How do I get started?

  • Define conversion metrics.
  • Define the value of conversions.
  • Factor in all costs.
  • Pressure test it. If these are the metrics, are they properly aligned with our goals?

There are situations that don’t work for performance based pricing models that are in place. Here are some ideas to make it work.

  • You have to start with 12 months of historical data.
  • Establish baselines
  • Establish the value of the conversion metric
  • Perform “what if” analysis — what if there’s a 10 percent increase in cost of applications or a 20 percent increase in revenues?
  • Be willing to adjust metrics based on “what if”.
  • Write it into the contract
  • Consider hybrid models

After all, at the end of the day, we all want to be in the winner’s circle!

Andrew is presenting next. In the beginning search was sold on a CPM basis. The rate card was $60 CPM. Today, pricing models come in a variety of forms, including:

  • Cost per sale
  • Revenue share
  • Cost per lead
  • Flat cost

Management fee pros/cons:

Pro: Percentage is fixed; if demand increases for your product or service, you always know what percentage you will pay out.

Con: No incentive for the agency to perform; risk is solely on the advertiser paying a fee, which is not tied into a metric.

Performance-based pros/cons:

Pro: Limited risk for the advertiser; agency pays for clicks and link building so that the site is more effective with generating sales/leads.

Con: Client is “married” to this partner; much data and knowledge are shared with the agency.

How to structure a PPC performance-based deal:

  • Flat management fee for 30-90 days, then flip to performance-based if appropriate
  • Both you and the agency have an out if necessary
  • Flush out the responsibilities of both parties
  • Agency research expenses are covered with management fee
  • Determine what can be achieved at a reasonable level

Necessities for putting a performance-based PPC campaign in place:

  • Site setup fundamentals
  • Historical PPC data (at least a year)
  • Keywords and ad groups in previous campaigns
  • Business data
  • Affiliate marketers
  • Creative arsenal
  • Landing page optimization

How to structure performance-based SEO campaigns:

  • Increased organic clicks:
    • You pay for each organic click above the campaign start amount
    • Take benchmark monthly traffic number of non-branded phrases
    • Compensate agency on increased amount of clicks on a CPC basis
  • Link acquisition
    • Compensate agency for each free link they acquire
    • Value of each link based on its PR or unique domain
  • Submission fee
    • Compensate agency for the amount of submissions they complete
    • Essentially, you pay for the time sent submitting to all outlets

Necessities for putting a performance-based SEO campaign in place:

  • Analytics
  • Historical SEO data (at least a year)
  • Creative arsenal

Issues with CPA models:

Who gets credit for the sale/lead? With multiple online marketing efforts, how do you determine which campaign or agency is responsible for the conversion?

What tools do you use to collect data? Use two during trial period to compare data and deterimine if one is more useful or accurate

Misconceptions of CPA models:

  • You can turn over a campaign to the agency and wash your hands of it. Not true! A cooperative relationship with frequent quality communication is key.
  • The client always gets the better end of the deal. Hopefully not! It can be a win-win situation.

Remember, any reputable agency will be open to discussing performance-based model with you.

Vivek Bhargava

The final presentation comes from Vivek. He starts by twisting the words of John Wanamaker to his liking: “I get paid for half of my advertising efforts. The trouble is, I know which half.” — Vivek Bhargava

If someone said my bounce rate is 90 percent, is this okay, bad or good? A popular blog with a high number of visitors and a high average time spent on the site might have this bounce rate. Don’t judge too quickly.

We may have to reevaluate our important metrics. Consider time spent on site, repeat visitors, clicks from specific profile of prospects and page views per visitor and 100 other metrics. Structure a performance-pricing deal based on the metric the client is really concerned with. Instead of CPC or CPA, think of CPW — cost per whatever.

Structure a win-win for the advertiser and the agency. Choose an all around approach toward measuring and tracking goals. And have a deeper understanding of the value added by each visitor. A performance-based model:

  • Ensures everyone works like partners
  • Increases innovation
  • Helps share the upside with the agency
  • Ensures strategy translates into value
  • Ensures the optimal distribution of media budgets
  • Forces deeper measurement metrics and increased focus on analytics




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