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August 27, 2012

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Traffic Targeting and Wastage

By Dan Warner
COO, Dark Blue Sea & Fabulous.com

Why does the traffic from some domains convert into sales, while traffic from a similar domain fails miserably?  How can traffic coming from the same search phrase vary so wildly between traffic sources?  The answer lies in the match between the intent of the user and the intent of the advertiser being aligned. 

The key to traffic conversion is the balance of two things; revenue generated for the traffic provider and sales generated for the advertiser. The Internet traffic available to advertisers is a scarce commodity.  There are more advertisers wanting traffic than there is traffic available for them to purchase.  This scarcity drives a need to maximize the use of all traffic to its fullest potential. Advertisers need volume in addition to conversion rates.


Dan Warner
COO, Dark Blue Sea & Fabulous.com

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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