Aligning Publisher and Agency Incentives

Posted by Courtland Smith on 16 December 2009 | 0 Comments

We’ve recently been introduced to a promising hybrid model used to sell online inventory that is part CPM and part CPC. Finding a pricing mechanism that encourages good behavior and aligns publisher and agency incentives has been a big challenge for our industry. Publishers tend to favor CPM pricing since what they will be paid for their online inventory is fairly predictable, and the risk for non-performance is placed on the agency. Agencies tend to favor CPC or CPA pricing since they are only paying for performance, and the risk of non-performance is placed on the publisher.

Critics of CPM pricing cite that it gives publishers an incentive to design their site to produce impressions, at the expense of user experience, and a decreased amount of time spent with the advertisements from each impression. Critics of CPC pricing note that it devalues publishers’ inventory, especially since the number of users that click on display ads has declined dramatically in recent years such that 85% of all display ad clicks are generated from 8% of the internet audience.

The goal of many in our industry is to create a pricing mechanism that avoids these pitfalls. A hybrid pricing model known as IPC, or Impressions Per Connection seeks to do just that. It was developed and patented by Ari Rosenberg, the former vice president of sales at IGN, and founder of Performance Pricing. The model has already been used by such agencies as Mindshare, Universal McCann, Digitas, Icon International, Carat Fusion, Initiative, Starcom Mediavest, and Publicis, among others. What is compelling about this model is that it provides for the sale of a publisher’s inventory on a CPM basis, but gives incentives to agencies for making advertisements that perform well.

How it works is that an IO is signed with CPM pricing, but if the campaign hits certain performance thresholds, the agency receives bonus impressions. This is totally counter-intuitive since one would expect that a higher performing campaign would cost the agency more, not less. There are a few reasons this pricing model is set up to lower eCPM for advertisers when their ad is performing well. One of the reasons is to provide the agency an incentive to produce engaging creative that will hit the performance goals. Another reason is that while eCPM is variable, the amount the publisher is paid is not, so the publisher can plan and budget based on a predictable payout.

The model is, in essence, a compromise between CPM and CPC/CPA pricing that also encourages good behavior from agencies to produce engaging creative, and so benefits the visitors of the publisher’s site. From a publisher perspective, CPM pricing is still preferable, and from an agency perspective, CPC/CPA pricing is better, but IPC pricing is a model that just might work for both and make the online landscape a better place for everyone.