Advertising Pricing Models

These are the common pricing models used in the online advertising market:

CPM (Cost-per-Mille, or Cost-per-Thousand) Pricing Models charge advertisers for impressions, i.e. the number of times people view an advertisement. Display advertising is commonly sold on a CPM pricing model. The problem with CPM advertising is that advertisers are charged even if the target audience does not click on the advertisement.

Cost Per Mille. Usually reflects the price of 1000 banner impressions in dollar currency. Payment depends on the number of impressions solely.  For example, a banner is being shown 200,000 times at CPM of $0.5, means that the payment by the advertiser to the publisher would be 200,000 * 0.5 / 1000 = $100.

Advantages

  • The advertiser knows exactly how many times the banner will be shown, and what would be his daily / total costs.
  • Common model when buying media against a specific URL / site / ad spot.
  • CPM is being prioritized first by ad-networks since the publisher knows exactly what the expected revenue per impression is.

Disadvantages

  • Very weak performance matrix, very weak correlation with sales or leads.
  • No indications for the advertiser on banner, campaign or media quality.
  • When dealing with multiple sites or ad spots advertiser might receive cheap media instead of effective media.
  • Effective frequency capping is unknown.

CPC (Cost-per-Click) advertising overcomes this problem by charging advertisers only when the consumer clicks on the advertisement.

Cost Per Click. Known also as pay-per-click (PPC) from the publisher’s point of view. In this model the advertiser pays for each click made on a banner impression.  Payment depends on the number of clicks solely.  For example, a banner is being shown 200,000 times, and being clicked 1000 times at a cost of $0.08 per click.  The Click through rate – CTR in this case is 1000/200,000 = 0.5%. The cost to the advertiser would be $0.08 * 1000 = $80.  Since the advertiser paid $80 for 200,000 we say that his Effective CPM (or eCPM) is 80/200 = $0.4.

Advantages

  • The advertiser knows exactly how many times his landing page / site will be clicked, and what would be his daily / total costs.
  • The banner will be shown until enough clicks are being generated
  • Common model when looking for exposure with no direct lead or sale goals
  • CPC is optimized quiet fast by optimizing ad-networks to generate high CTR
  • Reasonable indicator for banner quality

Disadvantages

  • Weak correlation with Sales or Leads
  • Dependable on click tracking technology and measurement
  • Weak performance matrix, vulnerable to click frauds
  • No indication for campaign quality (only banner quality)
  • Advertiser might receive cheap media instead of effective media
  • Effective frequency capping is unknown

In recent times, there has been a rapid increase in online lead generation – banner and direct response advertising that works off a CPL pricing model. In a Cost-per-Lead pricing model, advertisers pay only for qualified leads – irrespective of the clicks or impressions that went into generating the lead. CPL advertising is also commonly referred to as online lead generation.

Cost per Lead (CPL) pricing models are the most advertiser friendly. A recent IBM research study found that two-thirds of senior marketers expect 20 percent of ad revenue to move away from impression-based sales, in favor of action-based models within three years. CPL models allow advertisers to pay only for qualified leads as opposed to clicks or impressions and are at the pinnacle of the online advertising ROI hierarchy.

In CPA advertising, advertisers pay for a specific action such as a credit card transaction (also called CPO, Cost-Per-Order).

Advertisers need to be careful when choosing between CPL and CPA pricing models.

In CPL campaigns, advertisers pay for an interested lead – i.e. the contact information of a person interested in the advertiser’s product or service. CPL campaigns are suitable for brand marketers and direct response marketers looking to engage consumers at multiple touch-points – by building a newsletter list, community site, reward program or member acquisition program.

In CPA campaigns, the advertiser typically pays for a completed sale involving a credit card transaction. CPA is all about ‘now’ — it focuses on driving consumers to buy at that exact moment. If a visitor to the website doesn’t buy anything, there’s no easy way to re-market to them.

There are other important differentiators:

1. CPL campaigns are advertiser-centric. The advertiser remains in control of their brand, selecting trusted and contextually relevant publishers to run their offers. On the other hand, CPA and affiliate marketing campaigns are publisher-centric. Advertisers cede control over where their brand will appear, as publishers browse offers and pick which to run on their websites. Advertisers generally do not know where their offer is running.

2. CPL campaigns are usually high volume and light-weight. In CPL campaigns, consumers submit only basic contact information. The transaction can be as simple as an email address. On the other hand, CPA campaigns are usually low volume and complex. Typically, consumer has to submit credit card and other detailed information.

CPL advertising is more appropriate for advertisers looking to deploy acquisition campaigns by re-marketing to end consumers through e-newsletters, community sites, reward programs, loyalty programs and other engagement vehicles.

Cost Per Lead / Cost Per Acquisition / Cost Per Sale. In this model the advertiser pays explicitly per transaction type made by the buyer that resulted from a click on a banner impression.  Payment depends either on the cost of lead, cost of sale or a percentage of the sale’s revenue.  For example, a banner is being shown 200,000 times, and being clicked 1000 times. 10 clicks converted to a lead where the advertiser pays 5$ per lead. The total advertising cost would be 10*5 = 50$.

Advantages

  • The advertiser pays according to results only.
  • The banner will be shown for unlimited period of time.
  • Preferred model for the advertiser. Zero risk on his side.
  • Low vulnerability to frauds.
  • High correlation between sales and campaign and banner quality.

Disadvantages

  • Publisher will not allocate premium media for questionable profit
  • Publisher will refuse to work in this model when cpm / cpc models can fill his inventory
  • Dependable on conversion tracking technology and measurement.
  • Hard for the publisher to estimate when to stop a campaign

dCPM (Dynamic cost per mille) – This model is the most effective and balanced both advertiser and publisher. In this model the advertiser continues to advertise as long as his eCPA is under his CPA goal, and the publisher decides to advertise as long as the CPM he receives is higher than the competing advertisers.  This is why neither the CPM nor the eCPA in this model is fixed.

dCPM with a CPA taget.

The following example describes the decision making process:

Day 1 Day 2 Day 3
Impressions 100,000 150,000 200,000
CPM $0.4 $0.5 $0.6
Leads 10 15 16
Cost 100*0.4 = $40 150*0.5=$75 200*0.6= $120
eCPA 40/10 = $4 75/15 = $5 120/16 = $7.5

Analysis: On day 1 the optimization process sees that the advertiser is profitable and even has a margin as he pays $4 for a $5 worth leads. This usually means that by driving more traffic, more leads can be obtained. On day 2, more leads have been obtained, advertising still paying under his target lead price. On day 3, even more traffic is being bought breaking the CPA limit of the advertiser. The optimization process decides to reduce traffic for the campaign.

Day 4 Day 40
Impressions 150,000 150,000
CPM 0.5 $0.3
Leads 15 5
Cost $75 $45
eCPA 75/15 = $5 $9

 

Analysis: The campaign maintains a good balance between the eCPA for the advertiser and the CPM for the publisher until day 40 where even at the price of $0.3 CPM the campaign is not effective anymore at an eCPA of $9.  Publisher cannot decrease the price since other advertisers bid more and advertiser is not profitable. The campaign is dropped.

Advantages

  • The advertiser is optimized toward paying according to results only.
  • The publisher does not advertise unless advertiser pays minimal price.
  • The banner will be shown for unlimited period and unlimited amount of time as long as being effective for both sides.
  • Good balance between advertiser’s risk and publisher’s profit.
  • Low vulnerability to frauds.
  • Allows the advertiser to compete over premium media with high CPM at low risk as long as his campaign is effective.
  • Campaign stops automatically.

Disadvantages

  • Advertiser has to risk an initial sum before seeing results.
  • Dependable on conversion tracking technology.



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