Published August 11-16, 2023
As the founder of a B2C martech company (Netcore), I have often wondered why brands spend 80-90% of their marketing budgets on adtech (new customer acquisitions) and just 10-20% on Martech (existing customer retention, engagement, and growth). The land grab for new customers is an auction-powered arms race where the only winners are the Big Adtech platforms. Yet, brands continue to burn cash overlooking the pot of gold (existing customers) that exists right in front of them. They then complain about rising CAC, not realising that half of their spending is AdWaste because of retargeting, reacquisition, and wrong acquisition.
This has become even more stark in some recent customer interactions I have had. In a market where capital is hard to come by, their focus (finally) is on profitability. But the rising acquisition costs are hurting. For years, it was this drug that fuelled the ecstasy of revenue growth. Now, with investors and markets demanding profits, they need to cut costs – people, marketing, or both. The question is: how can they do so without compromising on growth (else their valuation is negatively impacted).
These interactions got me thinking because the conversations came down to how Netcore could optimise their martech spending. They were still not prepared to touch adtech spending which constituted the bulk of their marketing budgets. While I have written about AdWaste and the need to balance adtech and martech spending in the past, I realised that I needed to go beyond showing the waste and take a leaf out of adtech’s playbook – make martech as “cost of goods sold”, meaning that martech needed to move from being priced based on users and usage to utility and uplift. In other words, make it performance linked. Just like how adtech is.
This would entail a complete mindset shift in martech companies. Today, B2C martech companies like Netcore sell based on consumption (for email, SMS, WhatsApp) and customer base (monthly active users). It is like how adtech companies sold on CPM (number of impressions) in the early days of the industry. Then came the CPC (cost per click) revolution which made the budgets infinite. A business could link ad spending to revenue generated rather than thinking of it as a fixed cost. If the business was getting new revenue, the additional spending as a percentage of sales would be justified. In effect, advertising became COGS (cost of goods sold). Of course, this only works if the business can convert the incoming customer into a repeat buyer – but that was beyond the purview of adtech (or so thought the marketers). At the acquisition stage, brands did not think of lifetime value because of the immediate revenue boost they got with every new sale – even though the cost of that acquisition was high.
This business model shift powered the growth of adtech through the past two decades. Digital advertising is $450 billion, while martech (its ‘poor’ cousin) languishes at a fraction of that ($50 billion). If martech is to rise, then it needs to copy adtech’s pricing model – make its pricing linked to outcomes. Every martech company will thus need to think of itself as a “progency” (product-led agency), delivering measurable revenue growth to capture a percentage of the upside. Done right, this shift can enable martech companies to grow their TAM (total addressable market) and transform brand P&Ls by driving profitable growth.
In this series, I will explore how martech companies can change their future.
Adtech’s CPM to CPC Shift – 1
Digital advertising in the late 1990s was CPM (cost per thousand) driven. Advertisers paid based on the number of impressions. It was a model borrowed from print and TV where ads were priced based on circulation and reach, respectively. The shift from CPM to CPC (cost per click) came with Google AdWords in the early 2000s. Even though Google did not pioneer the pay per click (PPC) model, it industrialised it. In a digital world, there is no scarcity of inventory and outcomes (user actions) could be measured. This change in pricing model transformed the fortunes of Google and the adtech industry.
Adpushup offers a historical perspective:
Google was looking for a way to monetize its search engine, and because the brand was known for providing the best quality search experience for its users, monetizing with textually relevant ads instead of banner ads seemed like a good option. Google launched its search engine service in 1999 and it was in 2000 that the Adwords was introduced. The PPC model, however, was included only in 2002, before that it was all CPM. Yahoo, on the other hand, offered its ad based on the PPC model right from the beginning in 1998.
Goto.com already offered a pay-for-placement model. In 1998, however, it introduced the ability of automated auction/bidding, whereby the ad would be ranked for a key term, based on how much the advertiser was willing to pay. The advertiser would then pay Goto.com every time a user clicked on the ad. By mid 1998, people were paying as much as $1/click. The reasoning behind PPM was that the people who were willing to pay for top spots in general searches were more relevant and better websites.
… In 2001, where Google made $85 million from its CPM based ad revenue, Overture [formerly Goto.com] earned $288 million selling ads on a PPM (Paid Placement Model—Overture’s version of PPC) basis.
In 2002, Google revamped its Adwords program. It reintroduced Adwords which now included the option of PPC advertising. Google’s version of PPC was different from Overture’s PPM. Where Overture allowed its users to buy their way to the top—the higher your bid, the higher your listing; Google understood the importance of relevance and better user experience. You see, any big company could buy its way to the top, but if the ad was not relevant then it would generate fewer clicks, the users who end up clicking will not get anything relevant to what they searched for and the company would make no profit either.
Wikipedia adds: “Pay-per-click, along with cost per impression (CPM) and cost per order, is used to assess the cost-effectiveness and profitability of internet marketing and drive the cost of running an advertisement campaign as low as possible while retaining set goals. In Cost Per Thousand Impressions (CPM), the advertiser only pays for every 1000 impressions of the ad. Pay-per-click (PPC) has an advantage over cost per impression in that it conveys information about how effective the advertising was. Clicks are a way to measure attention and interest. If the main purpose of an ad is to generate a click, or more specifically drive traffic to a destination, then pay-per-click is the preferred metric.”
Adtech’s CPM to CPC Shift – 2
I asked ChatGPT and the Bard to summarise adtech’s evolution from CPM to PPC/CPC.
The shift from Cost Per Thousand (CPM) to Cost Per Click (CPC) was a major evolution in the digital advertising industry. Let’s take a look at the history.
Early Days – CPM Model
Digital advertising took off in the mid-1990s, with the CPM model being the predominant pricing method. Advertisers were charged for every thousand impressions of their ads, regardless of the audience’s reaction. The focus was primarily on reach and exposure, as brands were keen on establishing an online presence.
Shift to CPC – A User-Action Centric Model
The shift from CPM to CPC began with the emergence of search engines and their advertising platforms. The key player in this transition was Google, which launched its advertising service, Google AdWords (now Google Ads), in 2000.
The introduction of Google AdWords marked a significant shift in how digital advertising was done. Instead of focusing on impressions (as with CPM), AdWords utilized a CPC model where advertisers were charged only when users clicked on their ads. This model was more performance-based, as it allowed advertisers to directly link ad costs with user action (clicks), which were a closer step to conversions than mere impressions.
The CPC model was also appealing to advertisers because it reduced their risk. If an ad didn’t perform well (i.e., didn’t receive clicks), the advertiser wouldn’t be charged as much as they would under the CPM model.
Impact of the Shift
The shift from CPM to CPC had profound implications:
- Performance Measurement: Advertisers could now track which ads were performing well (receiving more clicks) and adjust their strategies accordingly. It provided more granular data for advertisers to analyze and optimize their campaigns.
- Financial Efficiency: The CPC model was more cost-efficient for advertisers. They only had to pay for actual clicks, not just for impressions, making their ad spend directly tied to a measurable action.
- Advertiser Accessibility: The CPC model, especially through platforms like Google AdWords, made digital advertising more accessible to smaller businesses. It allowed them to compete with larger companies in the same space.
- Evolution of SEO: With the prominence of search engine advertising, Search Engine Optimization (SEO) became crucial for businesses to get their websites and content ranked higher in search results.
- Further Evolution of Pricing Models: The success of the CPC model opened the door for other performance-based pricing models, like Cost Per Action (CPA), where advertisers pay only when users take a specified action (like making a purchase).
In summary, the shift from CPM to CPC was a game-changer in the digital advertising industry. It made advertising more performance-oriented, cost-efficient, and democratized the space by providing equal opportunities for businesses of all sizes.
Here are some additional details about the shift from CPM to CPC:
- The first PPC ad was sold by Goto.com in 1998.
- Google launched its AdWords program in 2000, which quickly became the dominant PPC platform.
- By 2005, CPC advertising had surpassed CPM advertising as the most popular form of digital advertising.
- Today, CPC advertising accounts for the majority of all digital advertising spend.
The shift from CPM to CPC has had a profound impact on the digital advertising world. It has made advertising more effective, more efficient, and more accountable. As a result, it has helped to drive the growth of the digital advertising industry.
Balance Sheet to P&L
The shift from CPM to CPC created the space for the rapid growth of digital advertising because it moved from a company’s balance sheet to P&L. (This was a point first explained to me by Vivek Bhargava, one of the pioneers in India’s adtech space. Also see Jaimit Doshi and my hippoBrain conversation with Vivek.)
In traditional business financial statements, the balance sheet provides a snapshot of a company’s financial position at a specific point in time, showing what a company owns (assets), what it owes (liabilities), and the shareholders’ equity. The Profit and Loss (P&L) statement, on the other hand, shows the company’s revenues, costs, and expenses over a period of time.
In the context of advertising expenditure, when we say an expense has moved from the balance sheet to the P&L, we’re talking about a shift in how that expense is accounted for and how it contributes to the business’s financial performance.
Under the CPM (Cost per Mille) model, digital advertising was more of a fixed cost. Brands would spend a certain amount to acquire a certain number of impressions, regardless of the actual business outcome from those impressions. There was no direct, performance-based link between the money spent and the results achieved. As such, this advertising expenditure was more akin to a capital investment in building brand awareness and market presence, and was hence considered more of a balance sheet item.
However, the shift to CPC (Cost per Click) or PPC (Pay per Click) models fundamentally changed this. Now, advertisers only paid when users interacted with their ads (i.e., clicked on them). This linked advertising costs directly to an action that could potentially lead to a sale or conversion, making advertising costs more closely tied to revenue generation. In this sense, advertising spend under the CPC model could be seen as a direct cost associated with generating sales.
This shift effectively moved advertising from being a fixed, up-front cost (an asset on the balance sheet) to being a variable cost directly tied to sales (an expense on the P&L). By tying advertising spend more closely to measurable actions and potential revenue, the CPC model made advertising expenditure more of an operational cost that could be managed and optimized based on its contribution to revenue. This helped businesses manage their marketing budgets more effectively and optimize their advertising strategies for better profitability.
Before CPC/PPC, digital advertising was often treated as an investment on the balance sheet. This is because it was difficult to measure the direct return on investment (ROI) of digital advertising campaigns. As a result, businesses often allocated a fixed amount of budget to digital advertising, regardless of the results.
CPC/PPC changed this by making it possible to measure the direct ROI of digital advertising campaigns. This is because CPC/PPC campaigns only pay when a user clicks on an ad, which means that businesses only pay for advertising that is actually generating leads or sales. As a result, businesses could now see how much money they were making from digital advertising, and they could adjust their budgets accordingly.
Martech needs to make this same transition. Today, it is a fixed cost under the “retention/engagement” head, the equivalent of CPM. It needs to move into the CPC/PPC world, where it becomes a P&L item – linked to outcomes and revenues. This migration can help B2C martech companies dramatically increase their TAM because (a) they will not have budget constraints, and (b) they can tap into the AdWaste money pool. What will it take to make this happen? The answer lies in thinking Martech 2.0.
Martech’s goal is to maximise lifetime value from existing customers. Done right, it can be the driver for exponential forever profitable growth leading to a profipoly (profits monopoly). As I explained in PxL: Transforming eCommerce P&Ls: “Globally, eCommerce companies are facing challenges in sustainable profitable growth as the era of growth-at-all-costs with funding on tap has ended. Improving (or becoming) profitable means two things: how to grow revenues (and therefore gross margin) and how to keep costs under control. Revenue increase comes from both sales growth from existing customers and via new customers. Among the costs, one of the biggest heads is typically marketing spends – acquisition of new customers via digital platforms. So, the most important levers for profitable growth come down to getting more from existing customers and reducing CAC (customer acquisition cost).”
In 4M and Netcore 2.0: A Framework for Exponential Growth, I had written about how Netcore needs to transform itself:
This new incarnation, Netcore 2.0, must be grounded in a clear understanding of the new realities of the marketplace. It’s no longer about how many messages are sent or how many active users are on the platform each month. Instead, the emphasis must shift to demonstrating tangible value to brands.
Netcore’s revenue model too must evolve, moving away from flat-rate charges to a performance-based model. In this new paradigm, Netcore’s success is directly tied to the success we drive for our clients. The more incremental sales we drive or the more AdWaste we help reduce for brands, the more revenue we generate. Such a shift not only ties Netcore’s growth to the value we provide to our customers but also differentiates us in a crowded marketplace, paving the way for a new chapter of sustainable growth and success.
… In essence, Netcore’s evolution involves evolving from a ‘units and users’ martech company with a comprehensive unistack, to a ubiquitous entity providing tangible utility and meaningful uplift. This transformation enables us to accelerate our customers towards their ‘profipoly’ goals. In doing so, Netcore transcends from being a mere tool to becoming an indispensable ally in our customers’ quest to create their unique profipolies.
The playbook for Netcore and other B2C martech companies is clear – replicate what the adtech industry has done in martech. The timing is right: with capital becoming scarce, brands are looking for profitable growth rather than growth-at-all-costs. The current approach of martech companies in a red ocean marketplace is to keep adding new features and compete on price to acquire customers (B2C brands). This is a race to the bottom and does not address the real problem that brands face: how to do more with less? The answer to this question will not come from adtech’s auction model which maximises profitable outcomes for Big Adtech. Instead, martech companies are best positioned to deliver “more with less” and become long-term profitability partners for brands – just like adtech companies have done for short-term revenue growth. After all, the best way to build a business is to ensure existing customers come back for more and bring their friends. As I explain in Part 7 of ProfitXL: Supersize Profits with the SHUVAM Framework, this is about “earned growth” rather than “bought growth”.
Performance-based pricing is the foundation of Martech 2.0, heralding a shift from point solutions to a progency (product-led agency) model. Done right, it will make martech companies the profit enablers for B2C businesses and power their own version of exponential forever profitable growth.
Martech 2.0 companies will need to change their mindset to become profitability partners for their B2C customers. Here is an 11-point agenda:
- Outcomes-Based Performance Metrics: Clearly define the metrics that will measure the success of the martech solutions. These metrics could include sales uplift, earned growth, engagement rates, customer retention, conversion rates, churn reduction, or reactivation-led revenues. It’s important that these metrics align with the specific goals of the customer and the capabilities of the martech solution.
- Outcome-Driven Pricing Models: Directly tied to the performance metrics, the pricing model is a fundamental change that could drive the entire value proposition. Transition from user or usage-based pricing models to performance-based models. Implement a pricing model where customers are charged based on the tangible improvements driven by the martech solutions, akin to adtech’s clicks or conversions model.
- Product Innovation for Performance-Driven Outcomes: With clear metrics and pricing model in place, product development should be guided by these performance outcomes. Develop martech solutions that support performance-based outcomes. These tools should enable personalised, real-time interactions, offer robust analytics, automate repetitive tasks, and seamlessly integrate with other technologies. Develop new offerings such as Email Shops to enhance Inbox Commerce and optimise the conversion funnel. Explore opportunities for leveraging Generative AI for content creation and journey orchestration.
- Sophisticated Tracking and Attribution Capabilities: To validate metrics and pricing, robust tracking and attribution technologies are crucial. Develop or adopt advanced tracking and attribution technologies to accurately measure the impact of your solutions on defined performance metrics. Leverage AI-ML to track and analyse customer behaviour and engagement across multiple touchpoints and platforms.
- Transparency and Trust: Trust is key to client relationships, so transparency about performance metrics and pricing needs to be prioritised. Ensure transparency in the calculation of performance metrics and pricing. Provide detailed analytics and reporting to customers, enabling them to discern the direct impact of martech solutions on their bottom line.
- Regulatory Compliance and Data Security: In an era of increased data breaches and regulatory scrutiny, compliance with data protection standards is essential. Prioritise data security and ensure alignment with global data protection standards to maintain customer trust and avoid legal complications. This becomes especially important as martech companies deal with increasingly sensitive zero- and first-party data.
- Flexible, Scalable, and Integrable Platform: As you develop new tools and capabilities, ensuring your platform remains adaptable and scalable will help meet diverse business needs. The platform should be compatible with existing ecommerce platforms, like Shopify, and support various apps and plugins to cater to the varying needs of B2C businesses.
- Martech-Enhanced Acquisition: Now that your system is set up for performance-based outcomes with existing customers, using it to optimise acquisition of new customers is the next logical step. Utilise data from Best customers (the Best Customer Genome) to reduce wasteful website clickthroughs and app uninstalls.
- Strategic Partnerships: Collaboration with other martech companies can expand your reach and effectiveness, offering a major advantage in a competitive market. This will enable businesses to leverage multiple solutions without the complications of integrating multiple platforms. For instance, partnerships with CDPs (customer data platforms) can ease 2-way data flows.
- Customer and Stakeholder Education: Once the new system is in place, it’s crucial to educate stakeholders about the changes and advantages of this new model. Showcase case studies, host training sessions, webinars, and workshops. Consider developing ROI calculators to demonstrate potential benefits. There’s a lot to learn from how adtech companies demonstrated the superiority of their platform and business model and thus drove the shift of dollars away from traditional media.
- Embrace the ‘Progency’ Model: Recognise the complexity of martech platforms and the necessity for expert ‘operators’ who can combine right- and left-brain skills to maximise their benefits. Delegating usage to in-house teams at brands or pure-play martech services companies may not leverage the full benefits of these platforms. Martech product companies, with a thin layer of added services, are best suited to unlock the full potential of these platforms.
Performance pricing models are the natural solutions for martech companies looking to grow. Just like their adtech peers did almost two decades ago, adtech-style martech can transform the world of digital marketing. It is an idea whose time has come.