Why CPC Sucks
by Kaila Colbin, Friday, June 3, 2011, 12:15 PM

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We need to have a talk, marketer to marketer — and, Google, I’ll need you to step out of the room for a minute. 

We’ve got a problem here.

Google has trained an entire generation of us to believe that the only cost structure that is at all fair is cost-per-click, cost-per-acquisition, cost-per-action, or some variation thereof.

“It’s just 50 cents!” they seem to say, innocently. “And you don’t even pay it unless it’s actually working!”

But there is a reason that Google’s market cap sits somewhere north of $170 billion. It is not because it’s only 50 cents. It is because it’s fifty cents every single time something happens.

We have entered an era of insidious and all-pervading ticket-clipping. Media companies are no longer content to supply eyeballs at a flat rate while we enjoy all the upside. Instead, you’ve got yourself a revenue share partner, like it or not — even if you have no rev.

What could be wrong with this picture? Sounds ideal, doesn’t it? We marketers don’t pay if the advertising is ineffective. We don’t pay while it’s not producing money for us. We can work out our business models to seven decimal places.

Like I said, insidious. Because, while we only pay if they’re doing their job, the reality is that the better you do your job, the more you have to pay. It makes it cheap to enter the market, but when you succeed, you end up paying through the nose.

I’ve recently come across a few companies that are toying with versions of the CPC model. There are two main variants: one in which there’s an unlimited cost-per-action element, and one in which the total cost of the campaign caps out at some pre-determined number.

Marketers, we can’t afford the first.

With Google, we know we can turn the tap and get new customers. The problem is that, to get new customers, we must turn the tap. But what we need is the possibility of the organic, the unpaid, the word of mouth, the (dare I say it) viral.

That’s why paid campaigns and SEO need to go hand-in-hand. That’s why if someone offers you a new channel and says it’s entirely CPC or CPA, now and forever, your response should be, “Why wouldn’t I just spend that money with Google?” There has to be an upside, a point at which the runaway success of your product lets it actually run away from its costs of acquisition.

The Google structure works really well where the lifetime value of a customer is known and relatively stable. For a start-up, it’s a mixed blessing. On the one hand, it provides infinite data, total granularity, and a despotic level of control over how and where the money gets spent. On the other hand, start-ups tend to be in a highly uncertain and variable environment for how they monetize — and they’re pegging costs to acquire against lifetime values that can take a year or more to become clear.

The cost-per-action model is not really different from the SaaS model, or the royalty system, or a subscription service. It is a model in which the supplier says, “I don’t know how you’re going to use my product, but I retain the right to keep charging you for it in case you figure out something really clever.”

But sometimes you just want to buy something off the shelf, and own it outright. Sometimes you have to recognize that your product itself is bringing customers back again and again and getting them to spend — and that, while CPC brings them horses to water, it sure don’t make ’em drink.

Thoughts? Let me know in the comments or on Twitter.


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