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The
enemy to advertisers and traffic affiliates alike is
traffic wastage. Traffic wastage is caused by a
misalignment between the exact intent of the user and
the match with an advertiser’s intent.
Traffic
affiliates have users that they trade as a commodity.
In exchange for this commodity they want to maximize the
revenue they are paid. Advertisers need the
traffic they provide, typically at a required volume and
value of conversion that is commercial.
This
transaction is actioned through a contract struck
typically with an intermediary. Google, as an
example, has an advertiser base of people who want to
buy traffic. These advertisers buy traffic by
choosing selective phrases (including domain phrases)
that represent the type of traffic that they want, thus
clarifying their intent.
Contextual
traffic can also be purchased by advertisers.
Contextual advertising is the practice of matching the
theme of phrases or web site content to the intent of
the advertiser. This traffic by nature is less
qualified than exact matching and typically the
advertiser pays less for the traffic. Effectively
advertisers are striking a contract to buy a supplied
commodity at a particular quality of conversion for a
set price – the advertiser’s receive value and
return on investment (ROI).
The
traffic affiliate, as another party in the contract,
agrees to provide traffic and expects to be paid the
maximum revenue value of what their traffic is really
worth. It should be considered that the traffic
affiliate is in control of a scarce commodity, and has
many avenues to sell this commodity at comparable
revenue returns.
The
last party in the transaction is typically a technology
intermediary. The technology intermediary provides
the matching between the user’s intent (traffic) and
the advertiser’s intent; represented by phrases,
categorical or untargeted advertisements.
It is
unrealistic to classify traffic quality into only four
categories. In reality traffic quality runs the
full gamut from horrifically bad to extraordinarily good
with no hard and fast distinctions in between.
However, for the sake of comparison it can be useful to
clarify the nature of traffic.
In
the perfect world - there would be an exact match
between every phrase that receives traffic and all the
advertisers who have products (including services)
aligning with those phrases. The number of
advertisers on every phrase would be deep enough that a
truly active and honest auction could occur for the
commodity (traffic), enabling the traffic provider to be
paid the highest value for their goods. In return
the advertiser would receive a consistent volume and
value of traffic that enables them to sell their
products at a reasonable margin of sale. Hence,
the perfect exchange would occur.
Unfortunately
internet advertising is not a perfect system.
There are millions of phrases that have no advertisers
bidding for them, the match between traffic and
advertiser is often poor, and the volume of traffic
matched to advertisers rarely meets the volume of
traffic they would like to obtain while meeting their
conversion criteria.
Imbalance
– as the perfect system does not currently exist
two outcomes have naturally occurred to rectify the
imbalance; arbitrage, and contextual blending.
Arbitrage
– defined as, “The simultaneous purchase and
selling of an asset in order to profit from a
differential in the price. This usually takes place on
different exchanges or marketplaces. Also known as a
"Riskless Profit" Investopedia.com
Market
forces have encouraged traffic affiliates to pool
traffic from various sources where the traffic is being
underutilized. This traffic is typically redirected to
advertisers through existing traffic monetization
channels. The downside to this activity is that it
usually involves pooling uncommercial, untargeted or
unqualified traffic – and then redirecting this pooled
traffic through another commercial domain. The
commercial phrases represented on the domain or even the
domain itself may have no realistic correlation to the
traffic being washed through the advertiser ads being
clicked.
The
value of this traffic is unnaturally misaligned with the
advertiser’s intent to bid on an exact phrase, or more
targeted contextual category. This misalignment causes a
reduction in conversion value to the advertiser as the
volume of traffic is increased for phrases with set bid
prices, while the value of the traffic is decreased due
to the distortion in traffic quality.
Arbitrage
latitude is the degree by which pooled traffic is
aligned with the advertiser’s actual intent. The
greater latitude discrepancy creates a lower rate of
conversion. Although it is possible to effectively
arbitrage traffic without a loss of quality to the
advertiser, it is typically unlikely.
When
phrases consistent with the consumer’s intent are
properly utilized, the intermediary technology tends to
compensate for the discrepancy between phrases or
appropriate traffic sources. Therefore, the greatest
market gap to arbitrage is an incentivized exchange of
traffic scavenged from sources of questionable quality
(untargeted phrases). This traffic is then in-turn
monetized through advertising networks which have poor
quality control, but are still able to maintain a strong
advertiser base.
These
advertising networks tend to be multi-billion dollar
companies with their own large supply of high quality
traffic. In smaller networks the quality drop from
volume arbitrage tends to drive down bid prices for the
whole network. This causes the quality issues to be
addressed or the network would become untenable.
Currently the larger networks seem to tolerate the
marginal bid price reduction caused by these activities.
Contextual
Blending – contextual advertising is most
consistently used as a means to interpret what a user
viewing a web site “might” be thinking about, and to
serve them advertisements similar to the content on the
web page. In regard to domains, contextual
advertising refers to contextual blending. Contextual
blending is based on an algorithmic approach that
determines how many advertisers are bidding on a phrase
(domain phrase) and their bid prices, in comparison to
other related commercial phrases. The algorithm selects
the most profitable blend of advertisements to serve,
rather than only the advertisements that match the exact
phrase the user was searching for.
The
benefits of contextual blending are significant. Often,
users are not exact enough in their searching behavior
(including typing in domains), so a contextual response
gives them a clarifying facility to use (usually by
associated commercial phrases on a side bar).
Contextual blending also rectifies the largest problem
faced by advertising networks, they have millions of
phrases nobody bids on or they don’t have enough
advertisers bidding on any given phrase to extract the
true value of the traffic from the bid auction process.
Contextual blending extracts greater revenue out of the
traffic for the advertising network and the traffic
affiliate. An important side effect is that it
provides a greater, if not less targeted, volume of
traffic for the advertisers who are effectively starving
for traffic.
So
what is wrong with contextual blending? The nature
of contextual advertising is that it is less targeted
and qualified to the user’s intent. This leads
to poorer conversion by the advertisers, peaks and
troughs of traffic quality, and encourages affiliates to
pool less qualified traffic into contextual networks.
Untargeted
Traffic – there is nothing wrong with having
erroneous or untargeted traffic. It is only wrong
to send untargeted traffic to advertisers who don’t
want untargeted traffic. Some advertisers have
products that have a general enough interest in the
market that unqualified traffic may still produce sales.
These advertisers can calculate the true value of the
traffic into their bid prices for unqualified phrases or
traffic sources. They then receive an expected
return on investment and the traffic affiliate is paid
what the traffic is really worth.
Value
Pricing – How do you compensate for the quality
imbalance caused by arbitrage, contextual blending, poor
traffic sources, and click fraud? Any compensation needs
to meet the value requirements of all parties involved.
Otherwise stated, no party can be advantaged by an
arbitrary process.
The
most equitable system is to compensate traffic
affiliates based on the revenue actually earned by the
advertiser. This is otherwise known as a Cost Per
Acquisition (CPA) model. However, it is known that many
CPA advertising systems make it too difficult to track
conversions, compare advertisers to find out who pays
the most for traffic, and management is complicated if
not untenable.
The
phrase bidding system used by search engines provide the
best means to ensure that traffic is distributed to the
advertisers that are willing to pay the most for the
traffic. The requirement for equity is not to
change the bidding system, but instead to ensure that
the advertiser pays only the fair value for the traffic.
This can be achieved by measuring the average conversion
rate for each traffic provider, and then only charging
the advertiser a relative bid price for each bided click
compared to a constant.
A
system similar to this is currently used by one of the
major search engines. Each affiliate is measured
to establish an average advertiser conversion rate and
then their rate is compared to a constant. From this
data a value score is assigned. In the case of this
provider the constant is measured in comparison to their
own search engines traffic conversion. The value score
then becomes the discount rate each advertiser is
charged for traffic coming from that affiliate.
As an
example: if an affiliate has a value score of 80% of the
constant’s value, and a user clicks on a $1.00
advertisement for one of the traffic affiliate’s
domain, the bid price charged to the advertiser is only
$0.80. This is compared to the $1.00 that would normally
have been charged had the same click occurred on the
system where the constant was derived.
This
method charges the advertiser based on the approximate
value that they received similar to other advertisers,
ensuring a consistent return on advertising investment.
The traffic affiliate also receives the value of what
their traffic was really worth and not an inflated value
in cases of lower quality. The upstream provider
also received only the commission on the click price
charged to the advertiser. This represents the
true value of what they have all offered. No one
is unfairly advantaged or disadvantaged – except for
one type of traffic affiliate.
Traffic
affiliates that have a greater quality of traffic, and a
higher conversion rate than the constant are penalized
by this system. If a traffic affiliate has a score
higher than that attributed to the upstream provider,
the advertiser is still only charged the same $1.00 that
would have been charged had the traffic come from the
constant. The system is flawed because it
discourages traffic affiliates from cleaning up their
traffic to a quality grade higher than what the
constant’s own traffic represents. In reality
most domain portfolios have a lower value score that the
conversions represented by their upstream provider.
However, it is still an issue that needs to be addressed
by any network choosing to utilize a value priced
charging method.
Advertisers
are becoming more sophisticated in how they measure
conversions every day. It is only a matter of time
before quality of conversion becomes the core attribute
that drives advertiser bid prices. Therefore,
value pricing is an eventual reality for every
advertising network. It is virtually impossible to
maintain the integrity of any major advertising system
without quality compensation.
*****
Coming
Soon: Dan Warner Discusses Brandable Domains Vs.
Generic Domains
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