Make Online Ads Accountable

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That's 2,000 ads per person a month, or nearly a hundred ads per person every business day. No wonder we've learned to screen out standard display ad units (like banners) and despise the more aggressive ones (like pop-ups and pop-unders).

It's also no wonder that so few sites "sell out" their inventory of display ads. Indeed, analysts expect online ad sales to drop 30% to 80% in the first quarter.

CPC vs. CPM

Next, let's take a closer look at those PubMatic numbers. Not every site is seeing the same degree of downward pricing pressure. PubMatic is seeing the highest average CPMs at 61¢ on its smallest sites (those with fewer than 1 million page views a month), CPMs of 30¢ on its medium-size sites (1 million to 100 million page views), and CPMs of 17¢ on its largest sites (more than 100 million page views).

One way to interpret this pricing disparity is obvious: The smaller the site, the more targeted the audience. The more targeted the audience, the more relevant the ad message. And the more relevant the ad message, the greater probability of impact—as measured by user click-through in response to an ad message. You might argue that the higher CPMs for smaller sites are a proxy for a different kind of metric: one that tracks the probabilities of users taking action based on ad messaging.

Which brings us to the rationale for changing the way we look at setting prices for ads online. Some companies and ad networks sell advertising based on the number of times a person clicks on an ad, a so-called cost-per-click (CPC) basis, or on the number of times a person takes another action, such as making a purchase or filling out a form. This is known as a cost-per-action (CPA) basis. Turns out, sites that sell on a CPC or CPA basis are growing pricing power and overall revenue even as the online display ad market teeters on the precipice of a bottomless chasm.

Consider the case of the world's largest CPC player, Google (GOOG). That company recently surprised the Street with better-than-expected fourth-quarter numbers, and analysts now predict its core business, search advertising, will grow 15% in 2009.

In January, the overall CPC sector saw average prices of 37¢ per click-through for retail, 45¢ per click-through for automotive, 58cent; for travel, and $1.37 for financial services, according to researcher Efficient Frontier. Meanwhile, some estimates show Google's AdWords averaging CPC rates of more than $1.50.

Think: Direct Marketing

Bottom line: You might conclude we're measuring online advertising in a perverse way. Yes, the Web is effective for brand building, but in dwelling relentlessly on display advertising and CPM pricing, we're losing focus on the Internet's real power as a medium for direct marketing and eliciting a response.

And don't forget that a lot of people are seeing those CPC ads who are not clicking through, which means that marketers are building brand and message awareness essentially free of charge. In fact, they're paying only when online consumers take action—and, miraculously, moving them one step closer to actually buying something.

To understand the implications for pricing, try this thought experiment: If CPC advertisers pay only when consumers act, what's the cost-per-thousand on click-throughs? Grossed up, the CPC rates cited above establish a CPM-equivalent price range of $370 for retail to $1,500 for AdWords. Now that's pricing power!

Perhaps that's why reporter Abbey Klaassen of Advertising Age calls the "spray and pray" mentality of online advertising will soon be over.

Taking its place is something radically different. It's what we might call accountable media: advertising you pay for only when it works. What a concept, especially in an economy where pressure on marketing to generate measurable return on investment is greater than ever. That's how online advertising will come out of this recession in a different way than it came in—more robust and much improved.

Jeffrey F. Rayport is founder and chairman of Marketspace, a digital strategy and customer experience practice affiliated with Monitor Group. Rayport was previously a faculty member at Harvard Business School.