Pay-for-performance model can open up advertising landscape
26 May, 2009
Mahesh Murthy, Founder and CEO, PinstormIt was nice to read about advertising firms cautiously moving to pay-for-performance advertising in The Economist.
At Pinstorm, we started out just over five years ago, on May 1, 2004 as a pure pay-for-performance advertising firm. Today, we are probably the leading practitioner of the craft, with eight offices across US, Europe, India, Singapore, Malaysia and China. And we have worked with HSBC, Jet, HP, Dell and other global brands.
We think there is simply no option to an advertising firm offering pay-for-performance. The other models are broken.
If an advertising agency charges a commission on a media spend, you know they have an incentive to get you to spend as much as possible. So they can earn as much as possible. But today, brands are built by outsmarting, not outspending. So you are not likely to be the winner in this relationship.
But, hey, you say, we pay our guys a retainer. We are not sure that’s any better. Paying a team a fixed price for their time, regardless of what they do with it is just as big a recipe for disaster. You will end up with an agency that tries to just keep you happy, so it can retain the retainer. There is no reward for great work that moves the needle, so to speak - and no penalty if an agency’s asleep at the wheel. This can’t be an inspiration to either party.
Pay-for-performance is the answer -- one that many agency heads have fought for decades. Quoting from the article: "Some agency executives are sceptical about being paid for value, because it is so subjective. They interpret talk about value as code for cost-cutting." We completely disagree.
When asked to present credentials, most firms will talk about how much value they add -- but when asked to measure that very value, you hear the bugles of retreat. And we don’t think it’s about cost-cutting - but quite the opposite, but more on that later. More importantly, marketers don’t have subjective measures of effectiveness. Their jobs are on the line if they aren’t able to convince their bosses and their boards that they are objectively, measurably adding value.
The problem is different: with agencies fighting furiously to get business, commissions have dropped from the 15% level to about 1.5% today. And retainers aren’t going up -- they went down in many cases in this downturn. With all this, the advertising persuasion has become an even more terrible business to be in. It’s not strange that after all these decades, there are no advertising billionaires, no ad agencies in the Fortune 500 -- and because there is really so little money in the business, it’s crazy difficult to attract great talent.
Pay-for-performance can change all that - it can bring MORE money into the business, not less. For starters, it helps advertising spend go from a fixed marketing budget to part of a variable cost-of-sale. And when that happens, the spends get uncorked. One look at why people have thronged to spend money on clicks from Google is because marketers love to pay for advertising performance of any sort on a variable basis.
More so, pay-for-performance lets you break away from creative straightjackets -- your client isn’t likely to interfere with your ads as much, as long as you are on brand, if you are being paid for how your ad works. And you are less likely to think first of what will impress the judges at Cannes, and more of what will impress your consumer, on pain of not getting your salary and bonus. Of course, sometimes, you might end up doing both, which is a fine thing.
Three, to repeat the point, it’s not subjective. All of us in the digital world have learned to live and die on the sword of how our ads perform. You may claim that you don’t have that power of objective measurement on TV or Print. We think you are somewhat right here -- but not for long. Soon all TV and all print -- not to mention all radio, outdoor and other media will be delivered digitally, and there will be mechanisms to measure effectiveness in each of these - if there aren’t already.
And it’s not just about clicks, leads and sales. There are sufficient measures already to measure all these supposed intangibles when it comes to brand awareness, strength and perception. And for ad firms to be paid according to these.
Comes the final argument -- "Oh, we are okay to take some part of our compensation as a variable, but hey we can’t walk away from our fixed income". Why so? This is probably more about your confidence in your art and craft than anything else.
At Pinstorm we have been 100% pure pay for performance from day 1, and we have managed to fund our own growth around the world over these years based on the monies we have earned. We go to more insane lengths than most agencies can imagine -- we even pay for all of the media spend from our own pockets -- and we bet every single day that our media investments combined with our strategy and our creative -- all paid for by us, if you please -- will make money for our clients and for us. And truth be told, often it does, though sometimes it doesn’t.
We will end this with an analogy -- the traditional world of media commissions is like the world of stock brokerages -- a commodity offering where growth comes from buying market share by offering lower fees. The creative side of agencies, paid on a flat-fee basis are the stock-recommendation analysts, on salary with no responsibility for the success or failure of their recommendations. Both these segments are but a small part of today’s financial landscape. Right for some investors, but not all.
In that vein, we are probably the mutual funds, the portfolio managers, the hedge funds or even the venture capitalists of this world, if you will. And I posit that it will be firms like ours or those after us that can open up this landscape and bring a lot more growth, vibrancy and innovation into the world of advertising and marketing. Yes, we will have our market crashes; yes, we will have our boom and bust cycles. But marketing and advertising are far too important activities to be left to some combination of media commissions and flat fees.
Of course, I am curious now how the people at The Economist think they will charge for advertising now and in the future. :-)
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One can’t keep on doing the same stuff over and over again across all kinds of brands. Every brand has a unique feature and this needs to be attributed through innovative marketing initiatives. Unless the people working in this medium can innovate, spends will not grow on internet. "
Great post . I can’t count the number of times I’ve told people that I do website and they confuse it with SEO. A challenge in this industry is to growing the term optimization outside of SEO. I do have one thing issue, there are dirty tricks to raise conversion rates that people who aren’t careful can fall for Seo Trends. An easy example, is offering something you can’t provide or being deceitful in any other way. This is especially dangerous if you aren’t tracking the true KPI (say using click throughs rather than a full conversion.) This is one reason why performance guarantees with search engine optimization can’t really guarantee you anything. Lastly, I would add that one reason to start website optimization vs. SEO is that its a huge competitive advantage now since very few players are testing their pages. Keep up the good work promoting optimization!
I think it's too narrow approach to internet marketing as it has bestowed in it greater potential than any other form of marketing. I am not totally agree or disagree with this opinion but it's disastrous to think internet from performance model perspective only. May be good for agency like pinstorm as they have made money on it and even their clients have done so.
But it's like ticking bomb which can explode anytime depending upon the only criteria of performance, if this happens than it truely defies the very purpose of marketing. There are several parameters which impacts the call to action and millions of brains cells together make it happen, how can one brand trigger those brain cells is marketing and internet does play a greater role in that, even search to action or impulsive marketing requires dynamics beyond performance.
This is an opportunity as it's no risk business for some but it's essence is far from core marketing which some agencies cannot understand into world of digital marketing and some are happy with this as a cash cow but true essence of internet marketing has lost in race for performance model specially in markets like India, China, Singapore and far east.
Still a question I pose to an agency which is purely performance driven? What are they doing to educate their clients?
Pay for performance, sometimes abbreviated "P4P", is a motivation concept in human resources, in which employees receive increased compensation for their work if their team, department or company reaches certain targets.The definition which Mahesh is using seems to be very limited.
It is quite interesting to see traditional advertising firms talking about pay for performance, when it is hard to measure the ROI on offline media. As consumers move towards online, measuring the responses and actions will not be hard. Certainly advertisers would need a bigger return for their spend. Most advertisers are already increasing the spend on digital media.
You must clarify what are you talking about... PPC or PPP?
Some people thot you are talking about "pay-per-performance/click" (PPC)...isn't that pretty much what you do as an agency irrespective of how you bottle it. If you are talking PPC, than people in this forum are damn right in abusing you, "surge of PPC will not lead Internet as an advertising medium anywhere... it will only make Google make money and waste on many other things in trying to become MS of Internet."
And if you are talking "pay-for-performance" (PPP) here... btw... in your whole damn article you didn't define the PERFORMANCE and "methods of measuring it"... isn't what you are saying is said a lot (there must be a whole wiki page dedicated to it and used by all tom, dick & harry inc. as well as Pinstorm in their website).
Did you just said that you actually wait till your client collect the money after sales because of your advertising and then pay you on that simple/complicated method you have conned them to accept? Don't joke in a forum... lot of people know that you lie well, don't affirm it. Or I am sure you have a lot of write-offs every year :D God bless your model...
My one line advise, "don't try to evangelize something that works in a matured market in a market which is still emerging."
Let's try to understand the basic difference between Advertising & Sales... Marketing and Sales... and then read an article like the one Mahesh has written here.
The pay-per-click regime is what helps Google make money and the likes of Mahesh help it make money... it neither delivers client any value if client is interested in advertising...
In all it is too narrow to look at a medium like internet as direct marketing or lead generation tool. Mahesh grow up and eat a humble pie, with your kind of lineage it looks pretty foolish to make such statements, either you could never learn basics of marketing & advertising in all these years or you have completely lost it.
I think Mahesh makes sense. The problem here is that in a forum like this "Pay for Performance" is misunderstood as "pay per lead". PPL is probably one of the component of the PPP.
Moreover, Mahesh is so right about agencies. The agency with whom we used to work with have come up with a so called "innovative approach" that carries a budget of 16 crores in 3 months. The agency is one of the large agencies and we are a start-up. Luckily, the campaign didn't go through and the agency was sacked later.
In my previous organisation, we were doing a TVC through this agency at a relatively big budget and during the shoot, the Creative Director and the Account head came up to us and said "we should do the shoot in Australia, next time" .:D
These 2 incidents and many more have led me to beleive that majority of the advertising agencies just dont understand their client's business and the size. All that they want to do is to fullfill their fantasy and come up with ideas that are damn expensive and are very unlikely to have an impact.
Its hightime that the advertising agencies learn how to handle and deliver value to clients. Else they'll end up serving only FMCG and Telecom clients.
Mahesh has focussed only on a micro activity of Advertising and is portraying it as a major activity. The intangibles of Advtg are pushed right off the table.
I Want To Start This Type Of Work Open Companies Add
& Make Money !
Hmmmm.... Mahesh I am not sure if you have considered the role of all the stake holders in the business. To tell you other than advertiser and agency there are publishers as well involved in the game. Will this model be vaible enough for publishers in the long term and what is the ROI for publishers in this model, needs to be thought through. Cheers!!!
Hi Mahesh, pay4performance is a great idea. Yes, in reality, it is just an 'idea'!
Please do remember a few things:
- It's not just about pitching pay4perf but also about giving the clients what you promised you'd deliver.
- You are going through a clear identity crisis - somewhere between an affiliate/network/agency. Please do something about clearing this misconception soon.
- Think of the people who are trying to give shape to your dreams - are they being paid for performance as well? They've bought into your idea, give up a cushy life for the drudgery involved; but what do they get in return?
- How long will you harp the same mantra? Get something new before all your people desert you for God's sake!
- And lastly, it's not just about BIG bhashans. Do something hands-on, help your team...
To even go the route that Mahesh is suggesting, we need to have a definition of Performance which is measurable. The definition which Mahesh is using seems to be very limited(leads atleast from Pinstorm model).
Advertisers provide a very vast role compared to this limited definition which is being used here.
Internet as a medium in itself is the most measurable meduium we have now. The measurability of the medium has now become a democles sword hanging over our heads.. instead of comparing internet viz a viz print and TV, we are here creating more metrics .. all for short term revenue gains.. and the icing on this is the pay per performance model!
I think its high time we put the foot down and say "hey, u spend 6 lacs for a qtr page on TOI on a single day, without having a clue what the ROI will be, but demand extremely severe performance from a medium that atleast tells you what ur ROI will be"
At last you conveyed your message of "Pay-on-performance" to everyone. Its definitely a great model but the fact is "with high risk comes high responsibility" and you are definitely living up to it. I really had great experience working with you while building Pinstorm in 2005 and congratulate you on Pinstorm's 5th Anniversary.
Take Care!
Ryan Govindan
A nice discussion is going on and it gave me an opportunity to understand different views. Let’s start with some basics of Pay for Performance. Publisher > Agency > Merchant. Merchants are the entities who actually need business in terms of sales, leads or brand value. Publishers are the sales agents who will work for the agency without salary and get paid when they show performance by bringing sales, leads, clicks or actual ad view. Agency is the intermediately who help the Merchants and Publishers to get linked with each other as well as provide the technology medium by which the performance of the publisher can be tracked as well as the merchant can calculate the exact ROI.
The discussion is about whether Pay-for-Performance is an acceptable business model for online industry or not. Definitely merchants will be happy as they have not to pay a single penny until they get the return as well as they can set their own term of quality of the performance. If we think as an Agency it is a double edged sword. To survive in the industry with a pay for performance business model is a challenge and I congratulate Mahesh and team for this thing. In last, Publisher who is there in industry to earn money by promoting other's business. Publishers are the only entity which hates the Pay-for-Performance business model as they have to work hard to earn money they want to earn.
So, Pay-for-Performance is definitely a good choice for Internet Marketing Industry. More and more merchants will be encouraged to divert their budget to this new segment. There are thousands of companies in various sectors but very few have initiated to enter this segment. Pay-for-Performance model will motivate them to enter this industry and in overall it is beneficial to the Internet Marketing Industry in India as whole.
Yogendra Oza
http://yogendraoza.blogspot.com
I think pay for performance is a great model. It ensures people actually pay for only quality leads and not just traffic.
I think soon most companies will start adopting this model. Just wondering how much is being charged per lead.
All Marketers are liars!!!
If every marketers thinks to pay only for Pay-for-performance then I believe they are hiring sales agents who can get them leads. On the other hand Advertising industry survive on intangible assets such as brand building. Marketing industry survies on creating a sales channel that will close the sales loop. Does Mahesh mean to say let's close the intangle brand building assets and the marketing channel that leads to sales and move to sales agent job by giving leads to client.
This article projects a rosy picture to get a sales agent job for Rs.50/- per lead which is not a viable business model. If Mahesh had not bunch loads to money to pump into business will he think about this business model.
Internet is a collabrative medium and not a pay per performance vechile. Pay per performance is just a segment in the internet.
Can Mahesh recommend his model to Google for Pay for performance to get leads and sales instead of getting clicks or fradulent clicks.
Good luck Mahesh!
Hey Mahesh, Please also "enlighten" us about the queality of leads ("performance") delivered. No disrespect meant but are any "performance" clients happy with the "performance" delivered in the form of erroneous (if I may add) leads???????
Cheers!
Why should internet be positioned as performance medium,it is not completely measurable,who is going to pay for the visibility that the brand gets?
What Mahesh says sounds good, but practically just not possible....there are a 1000 external factors which determine how the campaign performs, why should the agency and publisher loose out on earnings coz of factors that are not in their hand? End of the day CPA, CPL and other performance based campaigns are all skewed towards the clients and not the agency and Publishers..
Well Pay for Performance could have worked had the agencies been paid more than the client - naturally if you are going to put someone so accountable you do not want someone who will stall that accountability to be paid more.
Also it would work if measurement was flawless.
Lastly Pay for performance would work if there was great efficiency in advertising process on both client and agency side.
As all these things are lacking, pay for performance as the only way to pay is pretty exaggerated and is onlys erving the likes of Mr. Murthy in this forum.
Mahesh has valid points but the above writer "reality bites" also has some critically valid points about whether it is viable today.
The internet fraternity knows 'pay for performance' is the right approach - but making a living off it is obviously much more difficult. To that end kudos to mahesh & pinstorm, even if one side of the business is subsidising the other.
The path will have to move to pay for performance - but many advertising firms will perish (may be even pinstorm) before the model sets in.
It is like newspapers - if internet was invented before news papers, would newspapers ever exist?
Yet the world over (except india till now) , newspaper owners are fighting declining revenues and profits and delaying reality. With increasing number of people getting their news in realtime, news papers - (with yesterdays news) are something one now reads in the evenings for reading sake & to see ads with special offers!
Some in the media like India Today have stopped further internet investments till they see real return on those investments.
Only one newspaper in Seattle, USA had thrown away its physical paper and printing presses, and with the same journalists moved to completely to an online model only.
Will it survive? Probability is low as even news is freely available these days from multiple sources.... and there may be just a niche for local news which may not be a viable enough space to survive.
Business and the rate of change in human behaviour is more complex than logic would suggest.
If people & businesses were rational, why would millions visit Las Vegas, macau & casinos the world over everyday when they know upfront that the house (casino) always wins..
The model will evolve and we may be surprised by the speed (or lack of it) with which changes take place.
Mahesh is evangelising Pay for Performance advertising. From a Marketers perspective it is a good opportunity to increase the ROI. Since this is new idea, Mahesh has bravely taken the hits associated with a new idea.
But at the same time we must appreciate the fact that he has delivered what he has promised to his clients inspite of taking the hit, instead of passing the buck of increased costs to the clients which any other agency would have happily done.
I am sure that Pinstorm will be a much more successful company one day. All the Best Mahesh...
Mahesh, with all due respect, Pinstorm did start out in a great way but I am not sure if the business model has been successful to this day. Pinstorm has made a mockery out of pay-per-performance, and to maintain its so called "status" it goes on selling CPA and CPL deals at a loss so great that the entire organisation is reeling under heavy losses. The internet marketing fraternity is well aware of the blows that Pinstorm and its employees have suffered in the recent past. I would recommend that you take stock of the practical ground situation, and evolve your business model to meet market demands. Ensure employability & competence of your people, do not render them unemployable - because we are in people business!
All the very best.
Mahesh has done a great job of painting a very rosy picture for pay for performance advertising. No doubt, it makes sense for advertisers to pay only when an actual measurable goal has been achieved. However,like the other models , it has it's own pitfalls. Pay per perf. agencies make their money by achieving the goal at a lesser cost than the negotiated reward per transaction. They tend to strive for growth only to an extent where they can make some money on every transaction. The moment they hit the threshold where their cost per tranx. is equal to their reward, they go into a cruise mode compromising growth for the advertiser.
Answer to this issue is a tiered incentive structure. The problem here is that there is no scientific way of arriving at a perfect tiered structure and hence lots of things invariably remain in the air.
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