I believe that right pricing model for an advertiser to execute retargeting campaigns and other targeted display campaigns is usually CPM. While it is intuitive to select CPA as a pricing model because it ensures a specific performance, the reality is that buying on a CPA often limits the scale of your campaign. CPA buying shifts the risk and the responsibility for the arbitrage from the advertiser to the media seller. The typical reaction of a media seller in this scenario is to limit it’s risk and only pursue media buys that are performing well below the CPA earn out. For example, an advertiser is willing to pay $50 for every sale generated during a retargeting campaign. The retargeting company starts buying media to determine what the right price is for the inventory. Because the retargeter is taking all of the risk, they will typically set their allowable ad spend, i.e. what they are willing to spend on advertising per order, at a low level to make sure that they do not lose money. For this example, the retargeting company might set the allowable at $25 so they can try and earn a healthy markup on each order. The problem with this model is that the retargeting company has very little incentive to push the envelope anywhere near the real allowable. The basically go after the low hanging fruit, make a very high margin, and avoid the risky arbitrage. In this example, the company may have figured out that a $1.50 CPM backs into the $25 allowable for the retargeting company. The company will not bid on any inventory above $1.50 and the advertiser suffers because there are many orders that can be acquired by bidding above $1.50 that will fall within their $50 allowable.
CPM buying is much more scalable because it eliminates the arbitrage. The retargeting company in a CPM scenario is working on a smaller fee and their portion of the revenue is tied to the media spend. In a CPM scenario, the company is motivated to help the advertiser maximize the number of sales they can generate within the allowable. In the example above, a CPM retargeter will bid well above $1.50 to make sure the client gets all of the orders possible. In a CPA scenario, the retargeting company is motivated to maximize its own profit margins. This fundamental difference results in many lost sales for the advertiser.
Many advertisers are still concerned that the CPM based programs motivate media companies to spend, simply because that’s how they make money, while they don’t have to worry about this in a CPA buy. White it is true that the CPA buy has a built in regulator, CPM buying can be easily controlled through daily reporting and the reality that every smart performance oriented company knows they have to meet the CPA goal to satisfy the client and keep the business. As long as you know the company and trust them, an advertiser is almost always better off buying on a CPM because it can lead to many more sales , particularly on high performing programs like retargeting.
