Introduction to Online Advertising Models

If you are an advertiser and would want to know how to go about budgeting your outlay for paid inclusion, the following analysis and discussion would provide some guidelines in this regard. Of course, this section introduces the various advertising models and leaves to subsequent sections to help you prepare the actual budgets and bid for paid inclusion spots on search engines. Before we turn to the various advertising models, it needs to be noted that these models vary in terms of the specific needs of the advertisers i.e. whether they would like to pay for just website visits, or take it to conversions into sales, or midway between these two wherein they would like to pay for sign ups etc on their websites. Therefore, advertisers choose the option that suits them and is aligned with their business model.

CPC (Cost per Click)

Cost per Click (CPC) or Pay per Click (PPC) is a form of internet marketing wherein the advertisers pay the search engine or the publisher of the ads whenever their ads are clicked. It is defined as the “amount spent to get an advertisement clicked”. CPC is also defined as an “online advertising payment model in which payment is based solely on qualifying click-through”.

Normally, search engines like Google, Yahoo, and Bing either charges the advertisers a flat rate for the CPC or let them bid for paid inclusion.

The calculation of CPC is done in the following manner:

Cost Per Click = Advertising Costs / Ads Clicked.

In other words, the CPC to the advertiser is the cost that is obtained by dividing the total advertising cost by the number of times the ads are clicked.

On the other hand, the Bid-based CPC entails a private auction wherein the search engine company or the publisher invites interested parties to bid for inclusion on their search engines or websites. The bid based CPC is a separate topic for discussion altogether and the mechanics of this model would be discussed in detail in the section pertaining to it.

CPM (Cost per Mille)

Cost per Mille is a popular advertising model that is used by advertisers across the media and as we are discussing the online advertising models, it is defined as the cost to the advertiser for every thousand impressions. In the online realm, CPM is obtained by dividing the total cost to the advertiser for each thousand of page views that the website clocks up through the users navigating to it from the search engine results page.

CPM is especially used to calculate the ROI or the Return on Investment from the advertising within and across different media. For instance, if a particular advertiser is running multiple ad campaigns across different media, CPM provides the advertisers with a countable metric on how well their investment is faring or otherwise. Further, in the online medium, CPM is widely used to track the efficacy of ad campaigns that take recourse to paid inclusion across different search engines.

CPA (Cost per Action)

We have seen how advertisers opt for various pricing models for their marketing on search engines and publishers. Another form of pricing is the CPA or the Cost per Action, which is also known as Cost per Conversion. This is defined as the cost entailed to the advertiser based on the users performing a certain predefined action. For instance, it is common for many websites to request users who click on ads and arrive on their homepages to sign up for their newsletters, or register themselves, or request for a contact.

In the CPA pricing model, the advertiser pays the publisher only when the users perform the defined action and when contrasted with the CPC, which is simply based on click through, the CPA is more effective in adding value to the advertiser.

Consider the number of times you might have clicked on sponsored ads on Google or any site that you might be browsing through. How many times have you actually performed an action on the websites from the click through and instead, simply “walked away” without performing the action desired by the advertiser. Whereas CPA is, what the advertiser incurs in the former case and CPC is what the advertiser incurs in the latter case.

By now, it would have been evident that CPA is more effective from the advertisers’ perspective than CPC.

CPL (Cost per Lead)

Now that we have considered CPA, it is time to look at another form of pricing which is the CPL or the Cost per Lead. While CPA and CPL seem alike as both are based on an action or a lead occurring after the click through, there are some important differences between them.

Whereas CPA is usually determined based on an elaborate transaction typically involving users submitting their credit card information etc, CPL is a more basic form of pricing where the “lead” is all that matters. This lead can be as simple as leaving one’s contact information on the website and also includes a basic signup or request for more information.

Further, research has shown that CPL models are advertiser centric wherein the advertiser retains the option of determining where their ads are placed whereas CPA models are publisher centric wherein the advertisers cede control to the publisher over these aspects. This is because of the demanding nature of the CPA, which means that publishers retain the right to choose which ads to run on their websites.

Conclusion

In conclusion, considering the fact that the web has become the first choice for marketers in this 24/7 hyper-connected and hyper-linked world, it is no surprise that online marketing has become the course of choice in many business schools.