Online advertising can be quite confusing to the uninitiated with its variety of pricing models. Jacqui Boyd offers a guide to how it works.
Online advertising offers a variety of pricing models that may be confusing to marketing managers who are only just beginning to use online as a critical part of their marketing mix.
But the diversity and flexibility of pricing models is one of online advertising’s most significant advantages. It means that pricing for advertising campaigns can often be tied to performance and that the advertiser can closely link spending to the goals of a campaign.
This is a brief overview of some of the pricing models used in the world of online advertising:
Cost per thousand (CPM):
This is the most common pricing model in the online advertising world, and the one that most closely resembles offline advertising in that the advertiser is paying for the exposure of a message to a specific audience. The advertiser is charged a certain amount of money for every thousand impressions (every thousand times the ad is shown to a user browsing the Web site).
Cost per click (CPC):
CPC is a performance-based pricing model where the advertiser only pays the publisher for every click-through from a user that the ad receives (irrespective of how many users see the ad). This approach is especially common in search engine marketing.
Cost per action (CPA):
CPA is another performance pricing model. Here the advertiser only pays for the users who carry out a specific action, which is usually tied to a sale.
Cost per download (CPD):
The advertiser pays the publisher only for users who download an app or white paper or other data as a result of clicking through from the ad.
Cost per lead (CPL):
The advertiser only pays for qualified leads it receives – normally generated by the user filling in a Web form.
Hybrid models:
Some publishers and advertisers might structure deals around a combination of any of these models.
The ultimate challenge in online advertising is striking a happy medium between the needs of the publisher and advertiser. CPM is, unsurprisingly, the model that publishers like best since it guarantees that they will be paid for the advertising campaign, irrespective of its performance. Advertisers tend to favour pricing models that are tied to performance, such as CPA or CPC.
CPM remains the dominant model in South Africa and local online publishers are reluctant to negotiate deals based on CPA, CPC or other performance-based metrics.
However, we are starting to see some publishers become more open to CPA pricing models. For smaller publishers who have less traffic, CPC or CPA models can sometimes be more lucrative than CPM models. Many Web publishers might find CPA to be a good way of selling less popular advertising inventory. Indeed, CPA can generate huge returns for publishers provided they are willing to optimise to make their client’s campaigns perform at their best.
Each of these models has its place. A FMCG company looking to expose its brand to as many people as possible with no intention of generating online leads or sales would find the CPM model to be the best model for its campaign. By contrast, a CPA model would be a good fit for a campaign for an airline that is looking to sell off as many seats as quickly as it can as part of a winter sale.
Both publishers and advertisers should ensure that the deals they negotiate are lucrative for both of them. A deal where one party feels that they have been cornered inevitably leads to a failed campaign.