Pricing models in online advertising
There
are primarily three pricing models in online advertising: CPM, performance and
hybrid.
Cost per mille (CPM)
CPM,
also called "cost per thousand", is where advertisers pay for
exposure of their message to a specific audience. Here, "per mille"
means "per thousand impressions". The CPM pricing model is commonly
used for display ad formats such as rich media and videos and is similar to the
pricing model for offline media, where pricing is determined by broad audience
exposure. For example, a CPM of $10 means that it costs $10 to show the banner
on 1,000 page views. High-quality inventory can command a $20-plus CPM for a
static banner ad and $40-plus CPM for a rich media/video ad. A medium network
CPM would be in the $0.50–3.00 range.
Performance
This
consists of different versions of cost per click (CPC) and cost per action
(CPA). It is mainly composed of CPC because of the increasing popularity of
paid search.
Cost per click (CPC)
The
CPC pricing model, also commonly referred to as "pay per click", is a
performance-based advertising model that evolved from paid search. Within the
CPC model, an ad may be viewed many times, but the advertiser only pays for the
ad when someone actually clicks on it. As a result, the CPC model encourages
publishers to display ads in a relevant setting that will elicit an actionable
response from consumers. An example of a CPC model is Google Adwords. There are
two types of CPC models, auction-based and hybrid:
- Auction-based CPC – An auction-based CPC model combines CPC with a constantly changing pricing that is set by the advertiser, not the publisher. The advertiser bids on how much the keyword is worth. When a user searches for a particular term or phrase, the list of advertisers appears according to the order of bidding. Given that keyword search competition is based on an open marketplace, it is easy to imagine how pricing on highly profitable terms could increase rapidly. Depending on the search engine, minimum bids on a search term may start at $0.01 and exceed $50 for high-price products (such as private jets or malpractice lawsuits). The average CPC is still well below $1, however.
- Hybrid CPC – The hybrid CPC model combines bidding price with a number of other factors that are determined by the publisher, most notably the quality of the advertiser’s message and the resulting likelihood that users will click on the ad. In other words, a combination of the bid price and the relevancy of the ad to the search query determines the position of the ad. While Overture pioneered the basic auction CPC model, Google developed the hybrid model and has enhanced it every year, generating significantly increased monetization, far beyond most estimates. As a result, the monetization gap between Google and Yahoo has widened, prompting Yahoo to develop its version of hybrid pricing, code-named Panama.
Cost per action (CPA)
The
CPA pricing model is a performance-based system commonly used by advertisers,
whereby an advertiser only pays the publisher when a sale or lead or some other
defined action is taken. The CPA model is therefore attractive to merchants,
which assume little risk as they set the price they are willing to pay for the
action only. Virtually all direct marketing companies use some form of CPA
marketing as a component of their online marketing mix. The two most common
uses of CPA pricing are in affiliate marketing and lead generation. Affiliate
marketing is responsible for 10–15% of all ecommerce revenues. Additionally,
advertisers are increasingly turning to lead generation, given the fixed-price
nature and the ability of CPA agencies to generate a significant number of
leads for advertisers.
Hybrid
This
has the combined features of display and performance. A hybrid online marketing
campaign might involve a mix of CPM, CPC, and CPA or a mix of the two other
performance models. Most hybrid deals are designed in such a way that they
split the risk between publisher and advertiser.
