In performance-based marketing, advertisers don’t pay until they get sales. It’s become a popular model, but it’s one that leaves web publishers and ad distribution companies to bear all the risks. Lately, the digital landscape has become littered with their corpses.
One company that has survived is W4, a Santa Monica network that distributes ads from about 300 advertisers to about 1,000 websites. Chief Executive Jason Walker said he’s limited the company’s risk by identifying and avoiding questionable advertisers.
“If we believe we’re dealing with a fly-by-night advertiser and they don’t pass our credit risk and value proposition assessments, we pass on the opportunity,” Walker said.
He learned about the risks of the pay-for-performance model at his previous company. He and his late father, Doug; his brother, Adam; and another partner co-founded Hydra, a performance-based ad network in Beverly Hills. The Walkers disagreed with the fourth partner and were fired in early 2009.
About the same time, the Federal Trade Commission cracked down on companies that it deemed used deceptive advertising online and sales slowed throughout the industry. Many performance-based advertisers – Hydra’s clients – folded. While Hydra itself wasn’t targeted by any charges, it was caught in the downdraft.
Hydra went into receivership in 2009 and was acquired by Adknowledge, an ad network based in Kansas City, Mo., the following year.
Walker noted that uncollectable debts have driven other large performance-based networks out of business, including Adteractive, a San Francisco-based network that shut down earlier this year, and Epic Direct, a Markham, Ontario-based network that closed just last month. Copeac, a major network in Woodbury, N.Y., shuttered in January.
W4’s clients include florists, online schools, daily deal sites and national restaurant chains that distribute coupons. Under the performance model, advertisers don’t pay W4 until they close a sale and receive payment from the customer. But W4 has set times to pay sales commissions to online publishers. The different cycles mean that the firm often pays out commissions before receiving money from customers. If a customer goes out of business or refuses to pay, W4 is stuck with bad debt.
By contract, W4 can’t disclose the names of its Internet publishers that display the ads the firm places.
The model also presents a risk for the publishers because they put ads on their websites without any guarantee of a financial return. A publisher could show an ad a million times, but if no one clicks on the ad and buys the product, the website has given the advertiser a million viewings, called impressions, for free. If the publisher had signed up with a different ad network that pays for impressions rather than sales, the publisher would have made money. W4 addresses that problem by monitoring every campaign and pulling ads that don’t perform quickly.
Walker said some W4 clients pay as little as $5,000 per month in sales commissions, but most of the firm’s customers pay between $100,000 and $500,000. A few pay more than $1 million monthly. Walker declined to discuss the company’s revenue figures.
Steve Manning, chief executive of online ad agency FYMC in Sherman Oaks, is a customer. He’s in constant contact with W4 during a campaign.
“They can convince significant publishers to run ads at low payout rates that they otherwise wouldn’t run by telling them that in aggregate volume of transactions, they will make money,” Manning said of W4.
Family businesses
After forming other businesses, including an online finance company that helped credit union members finance computers and TVs, and an online design company, the family moved on to Hydra, which was founded in 2003. After years of growth, the company stalled in 2008, and Chief Executive Zac Brandenberg fired the Walkers.
The family members formed W4 in May 2009. Hydra sued the Walkers for breaking a noncompete clause, and the Walkers sued Brandenberg and controlling stockholder Kayne Anderson for wrongful termination and ruining the company, in which the Walkers still held a 40 percent stake. Both suits ended in a settlement “that included a substantial payment by Hydra to the Walkers,” said Robyn Crowther, an attorney at Caldwell Leslie who represented the Walkers.
At W4, Jason Walker serves as chief executive and Adam Walker as chief financial officer. Doug Walker died of cancer in January 2011. The fourth “W” is nonfamily member Abby Whitridge, chief operating officer. The company has 35 employees.
Jason Walker said he expects more competition in the future, but isn’t concerned.
“The more companies that get into market, the more validation it brings to our model,” he said. “When we see big companies step into the market, we’re happy about it.”
