On the surface, CPA programs sound great. Essentially, set it and forget it… except for the non-thinking administrative mess that accompanies these programs. Unfortunately, what starts out as a simplified way to manage a search program ultimately causes search atrophy.
As the market changes, and opportunities arise, or problems start to materialize, they are masked by the CPA number. So long as that is locked, you don’t have to worry about the leading KPIs. The reason for a CPA program is so you do not have to get into these details… they are someone else’s problem.
This works fine in scenarios where you don’t control the inputs anyway. Affiliate marketing is a great example of a program that can really only work on a CPA basis. Display programs, depending on your objectives, can also work okay here, in a limited fashion. But search has so many factors that are in your control, and enable you to optimize, it is silly to forgo the opportunity. Either you, or your agency should be focused on leveraging what search can offer.
To that end, beyond the masked KPIs, you have the more harmful affect of minimizing optimization opportunities. No online program, search or otherwise, is static. Either you change, or the market place changes. If you are doing your job, you will continue to change ahead of the market. With CPA, testing the end-to-end implications of a program are virtually impossible. If you change site metrics, this changes media performance; media that is opaque in a CPA program.
You miss the opportunity to identify nuances that lead to incremental and even big improvements in performance. As you improve site buy flow and conversions increase, you get more sales, but you lose the efficiencies you earned by creating the change. Yet the media properties benefit with higher compensation against the same work effort.
Part of the cycle of improving performance includes wider margins on existing media vehicles which can then be applied to new media opportunities. Consider…
Before conversion increases:
10,000 sales at $50 CPA = $500,000 / month in media spend at say, 40% media margin = $200,000 contribution.
Increase conversion by 10%.
11,000 in sales at $50 CPA = $550,000 at 40% margin = $220,000 contribution. Since your cost basis always moves with volume, you never become more efficient.
Now, assume you are managing search directly, not on a CPA. You will go from 10,000 to 11,000 in sales and pocket the entire additional $50K instead of $20k.
You go from $200,000 in contribution to $250,000 in contribution, or 25% improvement vs 10%.
Your margin goes from 40% to 50%.
If someone gave you a 25% bump in your budget, what would you do with it?
A couple of years ago, I went into how this can help agencies and clients in this post. The bottom line for clients & their agencies, is that keeping control of this is good for both. The comp model in the post, ironically, is performance based. The difference between what I propose and what Google is proposing is that by controlling the media all the way through to the purchase, you can optimized the whole chain. With strong agency / client relationships, agencies have an opportunity to increase compensation IF they increase the client’s profitable volume, and clients have visibility into the agency’s profitability, ensuring that margins really are being used to seek more sales.
This kind of optimization cycle is only available if you have end-to-end control of the process. Continual testing of keywords, copy, site layout, buy flow, offers, etc, is the only way to maximize what the web, and search in particular, have to offer.
More on the Google CPA from MediaPost.com