| Studies
& Opinions
Domainer–Madison Avenue Reconciliation
Alex Tajirian
August
14, 2007
1.
Introduction
The paucity of domain name acquisitions by Madison Avenue,
as a complementary advertising platform, has been widely attributed
to the misalignment of incentives between the advertising agencies
and domain name owners. However, we argue that advertisers need
to first consider additional factors in the selection of their domain-name
ad agency and must understand the risk-reward relationship associated
with domain name acquisitions. We also put forth recommendations
to bridge the knowledge gap between the stakeholders (namely, advertisers,
ad agencies, and domainers).
We first look at alternative compensation arrangements between Madison
Avenue and ad agencies and outline the decision variables necessary
for an efficient compensation arrangement. Based on these variables,
we derive the key implications for advertisers and domain name owners.
2.
Compensation Arrangements
For the most part, compensation arrangements between
advertisers and ad agencies fall into one of three broad categories:
flat fees, compensation based solely on performance, and the combination
of a set fee with performance-based rewards.
Deciding which approach to follow depends a lot on the
following:
a.
Whether the performance
metric is measurable ex post and ex ante.
b.
Whether the cause
of out- and under-performance can be identified. (Is ex post
performance attributable to the general industry environment or
to agency-specific actions?)
c.
How much initial
investment is needed for the ad agency to successfully manage a
campaign.
d.
The advertiser’s
appetite for risk.
3.
Advertiser Implications
The compensation arrangements outlined above lead to
the following actionable implications for the ad agency and the
advertiser:
a.
(2a) and (2b),
above, suggest the need for both sides to be comfortable with analytics.
(2c) suggests that the ad agency needs to feel comfortable with
capital budgeting analytics. (2d) suggests that even if the expected
return on a domain name acquisition is positive, the advertiser
need not approve a campaign if it represents a high risk-to-return
tradeoff.
b.
An advertiser
needs to select an ad agency that understands domain name industry
trends.
c.
Don’t look for
one ideal compensation arrangement that suits all domain name–based
advertising campaigns. When it comes to aligning the interest of
the ad agency and that of the advertiser, different marketing venues
require different approaches. To take one example: no matter how
small the initial outlays might be, compensation based solely on
performance may be a poor long-term choice if performance can be
measured but the causes of success or failure cannot.
4.
Domainer Implications
Domainers, like the ad agencies, need to be more comfortable
with domain name analytics. It is not enough to rely on, say, trend
reports that do not disclose their methodology or the sources of
their data. S-curve estimation, for example, is an extremely valuable
tool, especially when selling domain names to sophisticated clients.
5.
Concluding Remarks
a.
Successful acquisition
will be based on domain name–specific as well as industry-wide analytics.
b.
Advertisers need
to design an advertising performance compensation arrangement that
correctly aligns their interests with those of the selected ad agency.
c.
The ad agency
responsible for online campaigns must understand domain name analytics.
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