Is Pay Per Click Advertising Broken?

In this week’s Blog Community Bloggers Carnival Phil submitted Another Fundamental Flaw with Online Advertisement. In this article Phil argues that people who click on a pay per click advertisement on an internet site as a way of paying the publisher are comitting fraud and can “seriously harm the business model of online Internet advertising.”

First, is this way of rewarding the publisher fraudulent?

Fraud is generally defined as deceptive action deliberately carried out in order to pursue unfair or unlawful gain or benefit. Clicking on an ad that you’re not interested in is not deceptive. But is it right?

Are taxes right? Is it fair for one party to take money away from another party to give it to a third party to benefit the third party? The welfare systems of the world, corporate, middle class, and for lower income people, work this way. When someone clicks on an ad to say thank you to a publisher they are requiring the advertiser to reward the publisher, whether the advertiser benefits or not. Welfare has come to the internet.

Bring it a little closer to home. When you click an ad to say thank you to a publisher, you benefit from that warm fuzzy feeling of showing your approval. The publisher benefits with a few cents in their pocket. The advertiser likely doesn’t benefit, and is out a few cents. Over time advertisers will be less willing to pay for ads, since their cost per action have gone up. Publishers will be rewarded less for each ad click, even those from people who are sincerely interested in the ad’s content.

The second point is whether this way of rewarding the site will harm the business model of online advertisers.

The sole purpose of an ad is to promote a product and call people to action. In the best of worlds, all interested parties benefit. Advertisers successfully promote their product. Publishers receive income that they would not have without the advertising. The audience pays less for the publication than they otherwise would have to pay and become aware of products that may improve their lives.

In traditional print advertising the publisher is paid a flat rate to have advertising appear in the publication. This rate is loosely based on circulation. The higher the circulation, generally the more you have to pay for an ad. The larger the ad, the more you have to pay for it. Traditional television advertising is similar, except time is substituted for space, and the longer the ad the more you have to pay. This model of payment for advertising guarantees that the advertiser knows up front what they’ll have to pay, but doesn’t guarantee that the advertisement will be cost-effective.

Then comes the internet. Internet advertising can be paid for in three main ways

• Flat fee. As with print advertising, the fee has a general relationship to the circulation of the website (its popularity) and the size of the advertisement.
• Pay per thousand views (PPM).
• Pay per click (PPC).

As you can see, only one of these payment models is closely similar to traditional advertising payment models. Now, who benefits from the different payment models - the publisher, the advertiser, or the audience?

Each of the parties has different interests when it comes to advertising. The advertiser, as I said earlier, wants a cost effective ad. Advertisers want to minimize their cost per action. Publishers want to maximize their income per action. Readers want to read. Often, advertisements are an interruption to them, but most people tolerate them because they know that without the financial support the publisher receives from advertising, the site may not be considered to be viable by the publisher. Sometimes, if they arrive at a web page as a result of a search on a certain subject, an advertisement will make them aware of something that may directly benefit them.

With flat fee payment, the publisher has a guaranteed level of income. The advertiser has a guaranteed level of expenses.  Publishers have an incentive to increase their number of readers because they have a better chance of attracting advertisers and of increasing their rates. Advertisers will prefer sites with a higher number of readers because their CPA will tend to decrease. Many smaller publishers will be ignored as advertisers try to minimize their CPA.

With PPM, the advertiser pays only for actual page views. The publisher benefits by knowing exactly how much they will be paid for each page view. Advertisers may have a high CPA or low CPA per thousand page views, depending on the effectiveness of their advertising.

Notice that readers have been ignored in both these cases. They have no incentive to reward publishers by gratuitously following the link for an advertisement.

With PPC advertising, the advertiser pays for clicks on their ads. Theoretically this can benefit publishers because, even if they have only a small number of readers, they can maximize their income if they display well targeted ads that pay a high amount for each click. The primary benefit is to advertisers, whose CPA is minimized because they receive self-selected, pre-qualified prospects. Practically, small publishers are left in a ghetto of low-paying ads, while advertisers have to wonder if the ad clicks they pay for are from people who are actually interested in their product.

The model is already broken because it ignores the person who actually has to take action - the reader. Robert Heinlein used the acronym TANSTAAFL in his books. There ain’t no such thing as a free lunch. All decisions, all actions have a cost associated with them. People in general are more than willing to spend other people’s money if it has no observable consequences on them. In this case, the advertiser pays the costs of the reader’s actions. Advertisers are not going to change how people act.

The easiest solution to this broken model is to abandon it. Take the reader’s actions out of the loop of payment for advertising. Use only flat fee payment and pay per view. Save yourselves the stress of trying to work around human behavior and work with it. Pay per view still has some problems. A person can continually go back to a page to artificially inflate it’s view count, but how many people are willing to do this manually? Advertising brokers already have mechanisms in place to catch automated ad clicking. The same type of mechanisms could be turned to dealing with automated page viewing.

Readers - while scrupulous publishers appreciate you clicking on the ads on their site, they would really rather you did it only when the product being promoted is something in which you are interested. Show your appreciation in some other way. If you want to say thank you with money - deposit some in the publisher’s Paypal account. Most don’t have any minimum requirement and are grateful for any amount. The thought behind the donation really does count. If they don’t have a mechanism in place to accept tips, most publishers have a contact page. Send them an email to express your gratitude.

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