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Pricing Digital Marketing: Information, Risk Sharing and Performance

Arun Sundararajan

Last revised: June 2003

Abstract:   A unique value proposition of Internet-based digital marketing is the availability of precise measures of the actual performance of individual campaigns, which makes performance-based advertising pricing schedules feasible. These pricing schemes are studied in the presence of competition, performance uncertainty and asymmetric information about the quality of the client's content and the effectiveness of the publisher's technology. The paper's findings challenge the dominant practice of CPM-based pricing for digital marketing by establishing that performance-based pricing is always profit-improving for publishers, even when publishers are constrained to offer CPM-based pricing in parallel. It is shown that performance-based pricing cannot screen out clients with lower quality content/creative quality, and describe when to choose between low-end coverage and full coverage performance-based pricing. However, publishers can use performance-based pricing to credibly signal superior technological effectiveness. These results highlight the value of risk pooling for publishers of digital advertising, and the strategic role of pricing in signalling technological quality. Managerial guidelines are also provided for how to strategically respond to varying competitive intensity, client size and changes in outcome distributions.

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