Friday, 22 August 2014

introduction of online advertising

CPA, or cost per action, is the Holy Grail for targeted advertising.
- Marissa Mayer, President and CEO, Yahoo! (former VP of Search Product and User
Experience, Google)
The Internet has emerged as an incredibly important advertising medium. According to a recent
report, U.S. advertisers spent $31.7 billion on Internet advertising in 2011, a 22% increase from
2010 (Interactive Advertising Bureau 2012). In the early days of this technology, online advertisers
and publishers had simply used a CPM (cost per thousand impressions) model, standard to traditional
media advertising, and advertisers paid according to the number of times their advertisement
got delivered to consumers. However, the online advertising industry has recently shifted toward
performance-based pricing models that tie advertising payments to certain performance metrics.
Performance based pricing becomes the most prevalent pricing model since 2006 and approximately
65% of 2011 online advertising revenues were priced on a performance basis (Interactive Advertising
Bereau 2012). The rst performance-based pricing model to appear used a cost per click (CPC)
approach, in which advertsiers pay only when viewers click on the advertisment, as invented by
Overture (now part of Yahoo!). By 2002, the CPC model had been adopted by both Google and
Yahoo! and become the most widely used pricing model in paid search advertising (The Economist
However, the CPC model's dominance currently is being challenged by a new performance-based
pricing model that relies on CPA (cost per action) and calculates advertising payments according
to advertiser-speci ed actions, such as email sign-ups, downloads, sales leads, or purchases.1 In
2006, Google attracted media attention when it started to test a CPA model (e.g., Gonsalves
2006; Helft 2007). As the quote that opened this paper reveals, Google regards CPA as the Holy
Grail of targeted advertising (Gardiner 2007), and many online advertising companies have adopted
it, including not only Google (through its Prouduct Listing Ads) and eBay but also long-time
proponents of this model, such as ValueClick and Amazon has also been using the CPA
model in its a liate program (Libai et al. 2003)
The emergence of the CPA model has sparked controversy and debate within the online advertising
industry (Cumbrowski 2007; Ezzy 2006; Guanaccia 2006). On one side of the debate,
1Details on how the advertiser de nes an action and how Google tracks and reports the number of actions can
be found in Laycock (2007).
advertisers tend to prefer the CPA model, because the CPC model gives publishers little or no
incentive to improve the quality of the clicks delivered (they only seek to drive a high volume of
clicks to advertisers). Thus, advertisers worry that consumers who click are not actually interested
in the products being sold a problem exacerbated by the potential for fraudulent clicks by third
parties that aim to drive up advertisers' costs (Wilbur and Zhu 2009). Because the CPA model
ties advertising payments to sales of the advertisers' products, publishers must exert some e ort to
improve the quality of clicks. The CPA model also helps reduce the risk for advertisers, because if
an Internet advertisement fails to produce sales, advertisers do not su er any further nancial loss.
Therefore, the CPA model is considered to be a preferred model by advertisers, because it shifts the
risk almost entirely to publishers and it allows advertisers to easily manage their campaigns' return
on investment.
On the other side of the debate stand web publishers, who often prefer the CPC model. They
worry that the CPA model gives advertisers minimal incentives to convert clicks into sales, causing
a typical moral hazard problem. If an advertising campaign fails and generates no response, the web
publisher receives no payment for displaying the advertisement their web page. Publishers should
be responsible for in uencing the consumer, but not closing a deal. Furthermore, some advertisers
may take advantage of the CPA arrangement to run a multitude of advertisements that only raise
brand awareness, rather than generate immediate sales.2