How does the CPA Model work ?

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By Arnab March 23, 2007 filed in Miscellaneous, Internet Marketing, PPC, Queries

CPA or cost-per-action or cost-per-acquisition model can be defined as a payment model primarily used in affiliate marketing that is dependent on qualifying actions like sales and registrations. To make it more simple, in this compensation method, it is the publisher or the hosting site who bears the whole risk of running the advertisement while the advertiser pays for the media on the basis of only the total number of consumers who make a transaction (either purchasing or signing up). CPA model is best suited for banner advertisements but is the worst type of rate to be charged.

CPA is not a new concept. You can find that it is used in the traditional direct marketing firms for many years. It was originally developed from the demand for ‘return on investment’ or ROI and today it is the same reason that CPA has been introduced in online or affiliate marketing.

Publishers suffered losses because some unscrupulous and deceitful marketers – these companies used the CPA model to spam important opt-in lists and other forms of interactive media. After all they had nothing to lose! Many companies took the help of this model to analyze their offers risk free. The end result – publishers suffered huge losses and were left with outdated databases.

To combat this problem, the publishers have come to a solution. Both these publishers and CPA brokers now ask the vendor or the marketer to first conduct a test in front of a handful of audience at their own expense. The test rates can be as low as $25 per thousand allowing the latter to test an offer to a target audience of 100,000 opt-in recipients for an amount as small as $2,500.

The hybrid of the CPA/CPM models

The modern day CPA brokers are formatting agreements which have CPC components. The advantage of these hybrid models is that it minimizes the risk of the publisher and provides the marketer with valuable consumer feedback. After evaluation of the feedbacks the marketer gets an opportunity to modify the offers to make them more effective. In fact the click through report generated may also signify that pushing a sale is not the acquisition goal.
The hybrid model has other advantages too. It permits the publishers to come out of the business model assessment. Unlike the earlier times, there is no need for them to appraise individual offers and guess at conversion rates. Instead after the start of the hybrid test, every party can evaluate the final results. After assessment, if the payment or compensation turns out to be an effective CPM, both the publisher and advertiser get into the deal.
By allowing the media partners a small guarantee of their cost, they are assured they will cover their cost and be motivated to make the offer perform.

Is this Hybrid model suitable for all offers?

NO, this hybrid model that I just discussed is not meant for all. It is important to consider a few factors to check whether or not your offer will fit into this structure:

* The hard offer – According to this, a credit card is required to consummate the acquisition. Hard offers bring down the conversion rates.
* The soft offer - Unlike the previous one, this offer does not require a credit card for completion.
* General acceptance – It is important that the offer is such that it is widely accepted. Selling to publishers becomes much easier if the deal has a wide potential audience.
* Independent reporting – This is an important factor as most of the publishers prefer an independent source for conversion reporting.
* The trademark or brand – This is obvious! If the offer is from a well known brand, it will be more effective.
* Geography – Subtle yet important! Prefer that the offer must be a national or international proposition.
* Innovative – Having a creative but simple landing page will be useful.

The hybrid model is still not very common. The few companies that deal with this are – Acquire solution, Direct Advertising Response and DirectNet Advertising.net.