Following Fred Wilson's post about display advertising, and my post about demand-creation vs. demand-fulfillment advertising, I had another thought I'll share here regarding the pricing of "display" advertising (or in my terminology – Demand Creation Advertising)Fred Wilson says:
And I agree with Fred 100% on that… While auction-based CPC (cost-per-click) is a great way to price the value of demand-fulfillment-ads, it is certainly *not* the right way to price advertising which is introducing a brand and creating demand. That's because the users are *not* in immediate shopping mode, and the effect of the advertising on them is not necessarily embodied in an immediate click.
So following my thread, I had an idea which is slightly theoretical at this point, but could serve as a way to price Demand Creation Ads in the future:
Search ad inventory is inherently limited. That is why CPC bids on search terms are bidded up over time. In other words, the bids advertisers place reflect the balance between the value they get from each click, and the amount of clicks available on their keywords.
If this is true, then a mechanism that creates a lot more search queries and clicks should increase supply, thus reducing the cost of each keyword. One such mechanism are Demand Creation Ads (or, if you prefer – display ads). These ads don't necessarily create any immediate clicks, but they should create more searches for the brand down the road.
Assuming all this could be aggregated and tracked efficiently (a big IF), you could then price display ads based on one metric – the increase they create in future searches.
Then the next step in pricing would be to identify a common denominator between the pricing of search ads and the pricing of display ads. So for example, as an advertiser I would know that I could pay $1 per search click, or I could pay 50c for display ads that created enough future searches to reduce my search CPC to 40c per-click.
Again – I'm not sure how doable all this is, but if it were – I think this would bring on the golden age of display/demand-creation ads on the web, making them suddenly as efficient as search ads are perceived today.
UPDATE: John Battelle just posted some interesting data from eMarketer on the effect of demand-creation-ads on the # of search queries —————————–>
 It can be argued that CPA is a more perfect pricing model than CPC is, because it ties directly to the only real conversion metric that matters – the purchasing of a product. That is technically true, but I think that CPA has a few inherit deficiencies which make it a pretty bad solution for pricing ad inventory:
- It moves all the risk from the advertiser to the publisher. CPC perfectly balances the risks on both sides.
- CPC is a wonderful common denominator that allows all advertisers to participate in a single, easy-to-understand, marketplace. There is no comparable denominator in CPA.
- CPA requires a LOT of data points in order to establish the value of each ad and its probability of generating revenue. That makes it completely ineffective for a centralized and efficient marketplace.