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7 Deadly Sins of CPA Based Advertising

Written by: Cheryl Morris, VP Marketing

Are you willing to pay 5% more to acquire a customer that purchases 500% more? Most marketers would answer “yes” to this question; however, if you are buying digital advertising on a low-cost or inflexible CPA basis, the reality is that in practice you may not be!

Never has this missed opportunity been more harmful to advertisers than during the holidays, when measuring, bidding and optimizing your ad budgets for post-click, downstream behavior through ROI-based bidding has the highest potential for long-term positive impact on revenue. With eCommerce holiday retail sales in the US forecasted by eMarketer to hit $72B in 2014, there’s no time like the present to re-evaluate your bidding strategy.

While the advertising industry has encouraged the targeting of low-cost audiences, there are many inefficiencies and dirty little secrets within CPA-based bidding and optimization. Here are what we refer to as “the 7 deadly sins of CPA-based buying,” all of which center on the fact that low-cost, proxy metrics don’t consider downstream behavior or the lifetime value of your customers:

1. Results in opportunistic buying.

If you’re not optimizing your ad campaigns for downstream behavior and instead on an immediate action basis with CPA, you’re acquiring customers opportunistically – that is, with hopes that those who take an immediate action will also turn into lifelong customers.

CPA discounts downstream behavior like purchase events in that it focuses on higher funnel behavior that occurs right after the click of your ad, such as a mobile app install or a registration event – proxies for the true lifetime value that occurs over time.

2. Values all customers as equal.

CPA is typically set by marketers taking an average of their customer acquisition costs. In doing so, this CPA values all potential customers as equal – when in reality you know some customers are far more valuable than others. Some customers purchase once and never return, while others come back to purchase over and over again.

3. Discourages buying high value audiences, and encourages buying low value audiences.

Furthermore, because CPA represents an average of your customer acquisition costs, by definition this average is discouraging you from acquiring high value audiences who may cost slightly more. And in the same way, it encourages buying low value audiences who tend to cost much less.

4. Limits campaign scale.

If you’re buying based on a hard, inflexible CPA and not willing to pay more, you’ve limited the potential universe of people you can reach. When you’re willing to bid slightly higher for audiences, you are opening your doors to many more potential customers. This is a critical but often overlooked point in successfully scaling campaigns, and is particularly important for large-scale advertisers with volume goals.

5. No price elasticity.

During times of high demand like the holidays, when advertisers flood the market and overall costs rise, CPAs can severely limit campaign scale. A hard-set CPA is inflexible to market conditions and increased costs – crippling campaign reach with its inability to pay slightly more to reach customers who are in prime purchasing mode.

6. Encourages arbitrage.

CPA-based media buying offers a breeding ground for arbitrage-based models. If you’re buying on a CPA basis, the ad network you’re working with is often incentivized to buy the cheapest audiences possible and pocket the upside for themselves.

7. Overpay for cheap audiences.

Last but not least, the majority of the market is currently buying on a low-cost, CPA basis – including your competitors. And so as the law of supply and demand goes, this overwhelming demand for low-cost audiences is in fact driving up the prices of these cheap audiences – which means in turn, you’re overpaying for them!

So, how should you bid to avoid all these pitfills? The answer lies in moving beyond low-cost and proxy CPA metrics to true lifetime value, bidding today for future ROI. Enter Nanigans’ ad automation software, at the core of which is the ability to measure, predict and optimize your ad budgets toward lifetime value with our predictive modeling engine, smart pixel technology on desktop, and a free mobile SDK that closes the attribution loop.

Learn more about how our ad automation software can help your marketing team find your most valuable customers. Contact us today.

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