Digital Media Advertising Models By Pricing Method

Thursday, 25 March 2010 07:51

Several pricing models have evolved to dominate the online advertising market. The biggest change over the last few years is the emergence of performance-based pricing, mainly composed of CPC pricing, due to the increasing popularity of paid search. CPM pricing has remained relatively stable in the 40%-50% range over the past few years and has actually seen resurgence over the last two years, driven by new interactive display ad formats, such as rich media and videos. Hybrid models have experienced the biggest areas of decline as advertisers move more toward a strict branding or strict performance pricing format. This is a positive trend as it reflects a trend of online spending, more closely mimicking offline media spending. Through the first half of 2006, 48% of advertising revenues were on a CPM basis, 47% on a performance basis (i.e., CPC/CPA), and 5% on a hybrid basis (i.e., has some display and performance features). This compares to 43%, 10%, and 47% in 2000.

CPM (Cost Per Thousand)
The CPM pricing model is commonly used for display and rich media advertising and is similar to the pricing model for offline media, where pricing is determined by broad audience exposure. For example, a $10 CPM means 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 run of network CPM would be in the $0.50-$3.00 range.

Cost Per Click (CPC)
The CPC pricing model, which is also commonly referred to as PPC (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 relevant ads that will illicit an actionable response from consumers. There are two types of CPC models:

Auction-Based CPC Model. An auction-based CPC model combines CPC with a dynamic pricing that is set by the advertisers, 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. Overture created the first auction-based CPC model and holds a patent on the broad model. Given that keyword search competition is based on an open marketplace, one could see 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 may be as high as $50 or more for high price products (such as private jets or malpractice lawsuits). The average CPC is still well below $1, likely in the $0.40-$0.60 range.

Hybrid CPC Model. 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 determine 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, promoting Yahoo! to develop its version of hybrid pricing, code-named Panama.

Pay-Per-Call (PPC)
Similar to CPC, the Pay-Per-Call model is a performance-based advertising model, whereby search engines and directories can charge advertisers on a per lead basis. In the PPC model, ads are rendered with the company name, address, description, and a trackable toll-free number that redirects the consumer to an advertiser¡¯s actual phone number. Advertisers pay the PPC provider based on the actual calls made to the tollfree number. PPC represents an attractive opportunity as only 42% of the
20 million small and medium-sized businesses (SMB) in the United States have a website, and SMBs have demonstrated their willingness to pay for phone-based leads as evidenced by the approximate $16 billion in annual Yellow Page advertising spending. I expect PPC to become a natural extension of local search and to expand the search marketplace to include merchants who do not have websites or lack search marketing expertise. Pay-per-call has the opportunity to close the loop between online searches and offline buying.

Cost Per Action (CPA)
The CPA pricing model is a performance-based model 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 attractive as a merchant only pays an affiliate when a specific result is achieved. Additionally, the merchant assumes little risk in their advertising 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 forms of CPA pricing are utilized in affiliate marketing as well as 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 for CPA agencies to generate significant numbers of leads for advertisers.

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