Pricing models (CPM, CPC, Flat-rate) and CTR
Display advertising campaigns are traditionally charged on a CPM (Cost Per Mille, also called Cost Per Thousand) pricing model, for example: 4 € every 1000 ad impressions. Let’s assume that my ad is delivered 100,000 times (100,000 ad impressions) with a CPM of 4 €, that will cost me 400 €.
So the formula is:
CPM = (Impressions/1000) x € rate
In the example above:
(100,000 impressions /1000) *4 = 400
Another common pricing model is CPC (Cost Per Click, also called Pay Per Click), which is what Google AdWords is based on. In a CPC ad campaign, advertisers pay only when/if users click on their ads and not based on impressions. In other words, with a CPC model impressions are free.
Another pricing model is Flat-rate, which means the advertiser pays a fixed agreed fee, usually for a defined period of time, regardless of performance factors such as volume of impressions or clicks.
Which is the best model? Obviously it depends. In very general terms, here’s a quick comparison:
From a publisher (seller) point of view:
CPM is based on traffic, so it’s a good fit for popular sites with high traffic stats: you’re selling impressions, not clicks.
Another element to consider is that regular visitors of your site – returning to your site on a regular basis, typically as direct referrals (e.g. people having your site in their bookmarks) – will be less likely to click on ads than visitors coming to your site for the first time from search engines. Therefore CPM is generally better than CPC to monetize on traffic from direct referrals.
For small sites/small bloggers CPC is a better option compared to CPM. With CPC you can get good revenue even if your traffic is not tremendously high. The important bit is the placement and the implementation. Ads need to be relevant and blend well with your content, adding value to it. Good placement and implementation will make user clicks more likely.
Flat-rate is a bit of a gamble. For example you may sell an ad placement on your site for a month to an advertiser for a given price in consideration of some traffic expectations based on the past. If that specific month your traffic is higher than expected, the advertiser will have done a good deal, whereas if you have a poor month in terms of traffic, you’ll have done a good deal, because you’ll get that fixed rate anyway.
From an advertiser (buyer) perspective:
CPC usually gives more control on your spending, because you set your budget and pay only for actual clicks, whereas with CPM you may deplete your budget quickly if your ad is performing poorly.
I suppose CPM is a valid choice if the purpose of your ad campaign is not so much about getting users to click through and get to your landing page, but more generally getting your message across by being seen. For example, if the aim of your ad is letting people know that a particular movie is out (create awareness/generate business offline) rather than getting them to click though to your site to buy a ticket, your ad may serve its purpose well just by appearing and being seen on a popular and well targeted site.
Likewise, if the key factor for you is to get a placement on specific high-traffic/popular sites that allow you to get exposure to your target audience, it’s likely that those sites will sell placement on a CPM basis or via flat-rate fees.
Flat-rate, as said, is a bit of a gamble for both sides, as your expectation is set on the basis of past performances. The risk is obviously smaller if you buy ads on well-established sites with little fluctuation in traffic.
I have talked about impressions and about clicks. A key metric to measure an ad performance on a particular site is CTR (Click Through Rate), which is essentially the number of clicks on an ad divided by the number of times that ad is shown (number of impressions), expressed in percentage.
It is important to underline though that CTR in itself is not a conclusive measurement of success for an online advertising campaign. All you know from CTR is what percentage of people exposed to the ad clicks on it, what percentage of viewers is converted into “clickers”.
High CTR doesn’t always mean success though, for various reasons. Here are a few.
For example, your ad may be catchy but misleading: users may be tricked into thinking they’ll get a free phone, whereas you’re only advertising an expensive one. Or perhaps your ad may be doing a great job in sending users to your destination URL, but then your site may be very counter-intuitive and clunky to navigate or poorly designed and you may not be able to turn visitors into customers.
Less straightforwardly, your ad may be implemented deceptively on the publisher’s website – for instance it could be too close to navigational elements or excessively blended into the content – and users might be clicking on it by mistake. You would get unintentional, uninterested visitors and convert poorly.
Another unpleasant case could be fraud clicks from competitors – clicking your ads to boost your costs – or from publishers themselves – clicking to boost their earnings – or similar scenarios.
Bottom-line is that CTR is an important indicator of an ad performance on a given site, but not necessarily a definite measure of success, as it is an intermediate metric and doesn’t guarantee return of investment.