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CPA = Customer Permitted Arbitrage?

CPA has become one of the biggest farces in advertising. Networks pretend to be aligned with their advertising partners when they are really driving the wrong customers in an effort to benefit their margins. Unfortunately most media buyers are not shown the metrics to understand that lower quality customers are being shepherded to their site instead of qualified customers that cost a little more for the network to acquire.

Note we use the term “network” as an all encompassing term for entities charging on any model except straight software license fee or usage. DSPs, trading desks and SaaS platforms which take media spend in return for an agreed number of signups, clicks or conversions are one in the same.

Here’s how it works — let’s take two basic scenarios where a retail clothing brand is willing to pay a network $10 for a new customer:

  1. There may be a great deal of demand to reach a 45 year old woman. So the acquisition cost to attract her as a customer may be $9. This is within the $10 CPA range above. But take the assumption a bit further: maybe she will buy clothing for herself and, depending on the time of the year, for her family.
  2. A 20 year old man sees a shirt for half price and buys it. He has no intention of shopping with the brand ever again but can ba acquired at a $2 CPA because there is less demand against his profile

With this CPA model, the network will target as many of the 20 year old men as possible as they make an $8 margin versus a $1 margin on the 45 year old woman. But the worst part is that the brand doesn’t know how much business they are losing by failing to target the right audience. This creates a model that encourages opportunistic buying instead of building life-long customers.

The right way is to bid and buy is based on the actual revenue produced by the customers you are reaching.

If your network or advertising partner isn’t providing the opportunity to buy and optimize based on actual ROI or lifetime value, they are doing you a major disservice!

To learn more about how lifetime ROI optimization will benefit your business over CPA based optimization, contact us today!

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