Pricing Models for Online Ads – A Comparison
Whether you’re new to digital advertising or a seasoned pro, it is vital you understand the different payment mechanisms or pricing models that best suit your business goal.
Why is it so important?
It is the mechanism upon which your advertising revenue is dependent.
As a business looking to advertise on your website, the most common approach is to work with an ad network or directly with brands wanting to advertise their products. In each instance, the advertiser will have a business goal that determines how they will measure the success of their content. The metrics they use are impressions, clicks, and sales or acquisitions.
Each pricing model will offer varying degrees of risk and cost. You will need to weigh those against each other before proceeding with a contractual agreement.
Pricing Models for Digital Marketing?
Within digital marketing, there are five common pricing models. Each will have varying levels of risk and entry cost.
The models are:
- Flat-rate pricing
- Cost per mille (CPM)
- Cost per click (CPC)
- Cost per action (CPA)
- Cost per sale (CPS)
There are many pricing models but don’t be discouraged. Each provides an entry point for every type of business owner and publisher. It’s an opportunity to leverage experience, website quality, and reach to get the maximum benefit from digital advertising.
This is by far the simplest pricing format for publishers. It is often used by local news and trade publications as well as small to medium-sized publishers.
Rates are usually determined based on anticipated website traffic, the location of the ad, its size, and the contract length. A more extended contract will generally yield a slightly lower cost per day or week. A trade-off for a more reliable revenue stream.
While this form mechanism for digital advertising isn’t reliant on metrics, a publisher’s website traffic numbers will contribute to determining their rate.
Flat-rate pricing can be applied to virtually every type of advertising, including display advertising, sponsored content, newsletter sponsorships, channel sponsorships, and social media opportunities. It enables publishers to easily anticipate future earnings, which is why it is highly recommended for those just getting started.
CPM – Cost Per Mille
This metric reveals how much it costs to view an ad a thousand times on a website. You can easily calculate it using this equation:
Total cost = total impressions x CPM rate / one thousand.
CPM is another great entry point for businesses new to digital advertising because its main objective is to increase brand and product awareness rather than directly generating sales. For publishers with a smaller following but operate within a niche, it is a great way to build your reputation.
However, with lower traffic volume, the ads won’t be seen by as many people. It is, therefore, not very lucrative for small businesses.
Another downside to CPM is that it cannot account for surges in traffic. For example, if your sales are heavily influenced by seasonal discounts or significant product releases, you will end up with very inconsistent numbers.
The result is a constantly fluctuating revenue stream that will make it difficult to forecast revenue. CPM is mainly seen as a supplementary source of revenue or an excellent place to start and learn about digital advertising before moving on to a more lucrative pricing model.
CPC – Cost Per Click
With cost per click, advertisers will pay a publisher for each click generated by an ad. This mechanism is commonly used by performance advertisers for direct response campaigns.
Two different models determine the amount paid for each click – the price is either fixed, or it is bid for.
A fixed-rate CPC model requires both the advertiser and publisher to agree on a fixed price before the ad goes live. This will be written into the contractual agreement.
Bid-based pricing works differently and is much more dependent on the publisher’s content quality. In a CPC bidding campaign, first, the advertiser sets their maximum price per click. The publisher or website owner then places a bid for the ad. If the publisher has a high-quality landing page and a high bid, they will likely win the ad.
Within each industry and niche, there will be varying competition levels, meaning that each click’s cost will vary.
A fundamental issue with the CPC model that has seen it decrease in popularity with advertisers is click fraud. Advertisers are wary that setting up programs that generate clicks with bots is too easy. While there are plugins to counteract this, it is an understandable concern for advertisers.
CPA – Cost Per Action
In this pricing model, an advertiser only pays when a user completes a transaction. How the transaction is defined will vary depending on the advertiser’s goals. It could represent a purchase, free trial, download, or newsletter sign-up.
For advertisers, CPA is a great way to avoid the potential of click fraud because it is reliant on an action being completed. It has become hugely popular amongst advertisers for specific conversions that follow engagement with an advert inside of a mobile app.
CPAs place a lot of risk on the publisher’s site because you only get paid if the transaction is successful. This is an especially important metric for affiliate marketers who generate revenue from such transactions.
Equally, though, the CPA model incentivizes publishers to attract more visitors because their income is dependent on it, and there is technically no ceiling to your income.
CPS – Cost Per Sale
This is a low-risk model that allows advertisers to track each sale made. It is best suited to advertising traditional products or services and for mobile apps where in-app purchases are the advertising goal.
The only downside for publishers is that customer behavior has changed significantly in recent years. It is now very uncommon for somebody to make an impulse purchase. Instead, customers will often review an offer and then conduct their own market and product research before making a purchase.
For this reason, cookies and UTM codes are used to ensure correct attribution for a sale.
UTM (Urchin Tracking Module) codes are snippets of text added to the end of a URL. They allow you to track exactly where website traffic comes from when clicking a link to the target URL.
You should be able to negotiate with an advertiser a suitable cookie or UTM code validity period of 15 to 30 days. Within this timeframe, the customer who initially clicked through can make a purchase, and the publisher will still receive the commission.
How to Choose the Best Digital Advertising Pricing Model?
Each of the mechanisms described above has its positives and negatives for website owners and publishers looking to generate recurring revenue from digital advertising.
As a rule of thumb for publishers new to digital advertising, CPM or CPC (also known as PPC) pricing models are a better place to start because they involve a much lower risk.
Especially when working with advertising networks, building your reputation with these lower-income models will pay off down the road. If you jump straight into a high-risk model, such as CPS or CPA, and it fails, you can risk being blacklisted by an ad network.
These measures for ad effectiveness should be used as indicators for budgeting and planning your site advertising strategy. Tracking the performance of your advertising will help you make the best decisions for what ad content to serve and in what format.
For AdSanity subscribers looking to provide accurate data for your advertisers without the hassle of exporting reports, you can use the Advertiser Reporting Add-on to give your advertising partners direct access to the data they need.
That means less administrator work for you, and reliable reporting data for them.