The modern marketer’s predicament
Marketers no longer carve out budgets from one very big number – those days are now long gone. Today’s marketers work with targets adjusted by channel that may change in real-time. Measurability has turned Digital marketing into a sales function: marketers are accountable and are under pressure to deliver revenue and profitability. But problems arise when the marketing models are over-simplified and don’t serve the purpose that they were designed for. For example, the user acquisition goal should be to acquire high-quality new customers at a cost lower than their Customer Lifetime Value (CLV) . Both the CLV and the acquisition cost are variables. However, many advertisers are mistakenly translating this objective into a strategy to acquire all new customers at a fixed CPA (Cost Per Acquisition).
CPA is seductive
Many marketers buy at a fixed CPA rate. This enables them to control advertising spend and new customer targets. But more importantly CPA is seen (erroneously, as we will see) as risk free because the advertiser only pays for newly acquired customers. In other words, they view paying CPA as a win-win scenario because they are precisely managing their spend and delivering results.
All is not as it seems
The underlying assumption of CPA is that all users are of equal value. This is evidently flawed. This way of thinking does not align well with programmatic and focuses on the publisher and not on audiences. In addition, as we will show below, there are other problems too.
The challenges of scale and quality
The CPA model works by paying a flat fee on acquisition, no matter which customer was acquired. For publishers running CPA campaigns that means that most ads displayed will have zero value to them. Furthermore, for publishers with low click-to-conversion ratios, there’s a higher risk of generating no revenue at all and that translates into zero incentive. Therefore, the CPA model places 1) a limitation on the number of publishers willing to accept your campaign, 2) a limitation on the scale and reach that your campaign can achieve and 3) a limitation on the quality of publishers willing to accept your campaign – the majority of premium publishers which generally speaking attract high-quality users may have a high media cost but will deliver customers that have a higher customer lifetime value.
All consumers are not equal in value
As we’ve already discussed, the CPA model assumes all users are of equal value and conflicts and places a constraint on the acquisition goal of finding high-quality new customers. When a high-quality user (predicted by past behaviour and interests) visits an app, the advertiser should be bidding higher to win that ad space and place an ad in front of that user.
A race to the bottom
The paradox with working with fixed CPA models is that it tends to acquire lower and lower quality users and make acquisition strategies fail. As a marketing manager calculates a theoretical Customer Lifetime Value (CLV) and starts a campaign at a fixed CPA, the campaign will provide the campaign will provide not only good, but also bad quality customers. As a result, the CLV may be lower than initially hoped for due to the mix of good and bad customers, resulting in the manager reducing the CPA target. In return, this causes the blend of newly acquired customers to worsen, which results in an even lower CLV and a poor acquisition strategy.
By contrast, good strategies focus on solid and trusted partnerships between advertisers and programmatic buying platforms. Trust which comes in the form of transparency from the platform in return for access to valuable data from the advertiser. As a result, both parties can cooperate in a buying strategy that goes beyond achieving a CPA, but which focuses on acquiring customers with a Customer Lifetime Value higher than their acquisition cost.
This not only results in a successful acquisition strategy, but also enables the programmatic platform to achieve the reach that the advertiser desires, without eliminating quality publishers just for their media cost.
dCPM at the heart of good strategy
Enter dCPM (Dynamic CPM), an advertising model that determines in real-time the value for each individual impression based on many factors and takes into account the performance goal for the campaign (and not just the cost of the acquisition). dCPM addresses the problems with CPA and CPM pricing when working with performance goals. At end of the day, an advertiser should achieve the campaign objective of acquiring customers at a lower cost than their customer lifetime value, and they should achieve this by paying a fair price for the media based on many parameters that have come into play to determine the value for a specific ad placement
In order to leverage the rich data set offered by programmatic and focus on high-quality new users, programmatic offers a good solution with Dynamic CPM that gives marketers transparency, insights and optimization options for improving campaign performance.