There are three main ways of pricing online media – CPC, CPM, and CPA. The difference between the three is what deliverable the Publisher and Marketer agree to bill on. As you’ll see below, the pricing structure often reflects who has the bargaining power, as well as the quality of the product.
CPM – Premium Inventory, Premium Publishers, Premium Price
CPM, which stands for Cost-Per-Mille (Mille is Latin for “thousand”), is when the price is based on 1,000 impressions. Almost all Publishers prefer to bill on impressions because it is an inventory based product, rather than a performance based product. In other words, publishers risk nothing on ad performance with a CPM system and get paid for every impression. For the largest and best-known Publishers, this is the pricing standard and in terms of overall cost, CPM priced media is almost always at the top of the food chain.
CPC – Realm of the Small Publisher and Direct Response Marketer
CPC stands for Cost-Per-Click, and is a performance-based metric. This means the Publisher only gets paid when (and if) a user clicks on an ad, no matter how many impressions they serve trying to get the click. As you can guess, this pricing structure is much more favorable to Marketers, but can be difficult if not impossible to negotiate with any Publisher with a premium brand, especially with all the Ad Networks and Ad Exchanges out there today willing to pick up unsold inventory and pay by CPM, albeit a low CPM. Publishers don’t like CPC pricing because it is difficult to plan inventory demand around a moving target like click-through-rate on an ad they’ve never seen or tested before. Two campaigns with the same CPC rate might require vastly different levels of impressions for the Publisher to bill in full and this uncertainty is a high opportunity cost to pay. Only when they’ve exhausted their ability to sell by CPM will Publishers entertain CPC offers, and by that point, Marketers are scraping the bottom of the barrel in terms of inventory availability and quality. If you are a brand fighting for the attention of a key demographic, this simply won’t do.
For smaller publishers without much of a brand however, selling their inventory on a CPC basis is often the only option they have. But don’t let the disdain among premium Publishers fool you, the CPC media business is an immense, multi-billion dollar market and there are plenty of people making a fortune off clicks. Just ask Google – Google’s AdSense product is the largest CPC clearing house on earth that attracts Publishers and Marketers by the thousands. CPC is a very low risk way to buy media because Marketers only have to pay for performance, so they have some level of confidence in their return on investment.
CPA – A Key ROI and Optimization Metric, but Rarely a Pricing Option
CPA, or Cost Per Action, or sometimes Cost Per Acquisition is the best deal of all for Advertisers in terms of risk because they only pay for media when it results in a sale, or conversion against their campaign goal. At this level, Marketers can pick the most they’re willing to spend for a sale and can basically set an unlimited budget and forget about it. Similarly to CPC pricing, this is usually an awful deal for Publishers. Affiliate Marketing programs operate on a CPA basis with Publishers that are exclusively devoted to hawking their products with sites that are more advertorial than anything else.
That said, all Direct Marketers will calculate their effective CPA, or eCPA as an optimization metric and to track their Return on Investment. An eCPA can be calculated by taking the total marketing cost and dividing it by the number of sales realized. So, if you were a company that bought $50 worth of media to advertise a product and made 5 sales to people that clicked on your ad, your eCPA was $50 / 5 sales = $10 per sale. This was a great deal if you make more than $10 in profit on each sale, but if not, you’ll have to rethink your marketing strategy.
Examples / Tools –
To help visualize these pricing options, look at the table below, which shows how $1,000 of media would need to be priced and perform for each method discussed above.
Cost Basis Impressions Clicks Click Rate Conversions (Actions) Conversion Rate Price Total Cost
CPM 100,000 500 0.5% 50 10.0% $10.00 $1,000.00
CPC 100,000 500 0.5% 50 10.0% $2.00 $1,000.00
CPA 100,000 500 0.5% 50 10.0% $20.00 $1,000.00