On the heels of the recent merger of Connexus Corporation (Traffic Marketplace) and Epic Advertising, I would like to discuss the merits of each of the current online advertising pricing models. Years ago, sales teams and media buyers used a simple model where ad inventory for print or broadcast television were normally sold on a Cost Per Thousand Impressions (CPM) basis, against a rate base and rate card. Once the rate was negotiated, the deal was culminated in the ad being placed. With the recent rapid growth in online advertising, we have entered an era where the "click" and "action" were introduced as an added means of payment and campaign measurement. Let's review how each pricing model is used and our predictions for the future of online advertising pricing models.
Cost Per Action (CPA): Initially, this pricing model was seen as the truest form of online direct response advertising. CPA was the also the closest comparison to direct mail, and therefore attractive to the large number of DR-focused advertisers on the web. CPA provides little financial risk to advertisers as they only pay the publisher, network or exchange for a quantifiable action (usually in the form of a sale, subscription, download or activation.) It goes one step further than advertisers simply paying for a click from an ad to their own website; it means that advertisers pay only an agreed-upon dollar amount if a qualified sale occurs on their site. Historically, CPA is closely related to Cost Per Lead (CPL) in which advertisers pay for a specific type of lead and Revenue Share, in which advertisers pay a percentage of the sale (rather than fixed dollar amount) generated on their site stemming from an ad or campaign.
Cost Per Click (CPC): This pricing model gained its popularity through search engine marketing, which Google can attribute some of its success to as a large number of advertisers ran CPC campaigns. In this equation, advertisers simply pay for a click to their website from an ad. If the advertiser is using a CPC basis as the objective to obtain sales or conversions from that click, the advertisers are taking the risk that their site will convert the visitor into a paid customer. This is a valuable pricing model if the advertiser's website has strong conversion ability and the advertiser's primary goal is to boost traffic to their site.
The economic models detailed above have been broadly categorized as "Performance-based Marketing". According to the IAB/PwC, performance-based marketing made up 59% of all online ad revenues in 2009, up from 57% in 2008. The other predominant pricing model is:
Cost Per Thousand Impressions (CPM): This pricing model has been closely compared to the models used in offline media as advertisers pay for their ads to run and be viewable to the user a certain number of times. Each time an ad appears on a web page, it constitutes an impression. Advertisers, typically branded advertisers, pay for the ability to show their ads to a site's audience yielding broad exposure, audience reach and other brand-building benefits. Exact CPM rates can fluctuate based on the publisher's site, specific placement on a site, target audience and other factors.
Perhaps the biggest takeaway we have related to these pricing models is that for years now they have been viewed as operating in silos or independent of each other. Advertisers or industry pundits would have claimed, and to some extent still do, that CPA had no ability to provide any branding value or that CPM had no aspects of "performance" or targeting inherent in it at all.
We disagree. We believe that each major pricing model resides on a virtual continuum. More and more, CPM or brand-based advertisers welcome the ability to access additional data about their campaigns and customers so they can optimize spending better. Likewise, some well-known branded advertisers run campaigns on a CPA basis. There isn't a better or worse; it really depends on the goals and objectives of the advertiser. The best network partners are able to create and provide any type of campaign on any distribution platform like display, search, social media, video or mobile. This is one of the major benefits of our recent merger for instance and where we think online advertising needs to move towards. MediaPost summarizes our thoughts fairly well in a recent article. Digital marketing can't be done in silos, or measured in silos; in fact, in the future the best ad intermediaries should be able to provide brand awareness, brand extension, action, CRM and loyalty in digital campaigns.
Senior Vice President, Sales – Traffic Marketplace
