What are the digital advertising pricing models, and why do they matter?

Depending on what you are trying to achieve with your marketing strategy, online advertising might be the best solution for client acquisition. In this article, we will cover: paid online advertising pricing models; examine differences and similarities between them; and most importantly, establish when to best use them.

There are several ways to price online ads, and some of them might seem a tad bit confusing. Especially when these models differ depending on your campaign goal, platform hosting the ad and the advertisement type itself. There are so many variables, it is easy to give up and just turn your back on paid digital ads altogether! Hold on, we are here to help. The four most commonly used models to calculate and pay for your digital advertising expenditures are Cost-Per-Click (CPC), Cost-Per-Mile (CPM), Cost-Per-Lead (CPL) and Cost-Per-Action (CPA). As their names suggest, any given pricing model implies a Cost Accrued for “something”. That “something” is actually what makes a big difference and can be a game-changer in your campaign performance. You might already be using any of these pricing models or slight variations of them in your advertising campaigns, but what if you could achieve better results by just changing the model? We want to help you better understand and use them correctly.

CPM, CPV and CPVi Ad Pricing Models; Pros and Cons

The most common pricing model for social media and video ads is the cost-per-mile (CPM) model. You might also use CPM bidding for Display and Search advertising, but the trend for CPM is not favorable for these types of ads. Search advertising has almost completely moved to cost-per-click (CPC) payment model, while Display Ads are moving towards cost-per-lead (CPL) or cost-per-action (CPA).

With the CPM pricing model, you pay a flat rate per 1000 impressions your ad gets. Simply put, you pay a price for every thousand impressions of your ad. CPV and CPVi are slight but meaningful alterations of the CPM model. Cost Per View (CPV) and Cost per Viewable Impression (CPVi) focus on views rather than impressions. The difference between the two is that Impression is counted when your ad loader is triggered, while view is counted when at least 50% of the ad is viewed (actually loaded) on the screen by the person the advertisement is meant for. The major issue with all three above-mentioned pricing models (CPM, CPV and CPVi) is that advertisers are charged regardless of whether anyone clicks their ad. YouTube, for example, bills advertisers on CPVi bases.

CPM is a flat rate for 1000 impressions, however every bundle of 1000 might cost you a slightly different amount. There are numerous variables that can influence CPM on a given Ad auction: What content is running alongside the ad? What format is the ad? How long is the ad? Is the ad skippable? How big is the competition for the same ad space you are trying to push your promotion into?

Advertising costs on any platform- say YouTube, can vary wildly depending on your answers to those questions. Still, there is one main question advertisers need to ask themselves when considering a CPM digital advertising campaign. “Am I willing to pay for just impressions with no actions or clicks?” – If your answer is NO! – we recommend you to consider a different pricing model.

PPC and CPC Ad Pricing Models; Pros and Cons

Cost-per-click (CPC) and Pay-per-click (PPC) are two different names for the similar advertising models. In simple terms, with PPC/CPC, you only pay when someone clicks on your ad. This model corrects one of the major issues the CPM model has – advertisers being charged, regardless of how many people click on the ad. That doesn’t mean the CPC model is perfect. For example, in the most common place where CPC is used – search advertising, due to the competition, prices for keywords (search queries for which you want your ad to be displayed) have become very expensive, and the trend has been rising for years now.

Finance, Insurance and Professional services are the top three industries with the most expensive keywords. For example, a single click on a search ad for the keyword “Insurance” costs just under $55! However, having professionally selected targeted keywords to bid on, will lower your cost-per-click substantially.

While the CPC advertising model implies that you only pay for clicks regardless of count of impressions, there still are some other issues hidden under the surface apart from select keywords being too expensive. [It doesn’t guarantee clicks] You get charged for errant clicks that do not necessarily result in a lead or customer action, but the risk of your marketing expenditure not having desired impact on sales is lower compared to CPM model.

CPL and CPA Ad Pricing Models; Pros and Cons

Well, what to do if you are not interested in paying for Impressions, and clicks are not making much difference for you either? Worry not, Cost-per-lead (CPL) and Cost-per-acquisition (CPA) pricing models might be just for your marketing needs. With CPA, you accrue advertising costs only if your advertisement helped initiate a desired action (e.g.: purchase, download, subscription, etc.). While with CPL you only pay when your advertisement generates leads (e.g.: Person provides: Name, Surname, Email, Phone, etc.). These models eliminate the possibility of you being charged for irrelevant impressions, accidental clicks or views. With CPL and CPA, you only pay for qualified hot lead or desired action completion. Consequently, they make it easier to generate predictable returns on your marketing expenditure, or do they?

In 2008, the Obama campaign used CPL advertising to build email lists. A lead was only considered qualified if they signed up for a eNewsletter, making the campaign very cost-effective. We have observed that while using the CPL model, the cost-per-lead will increase depending on the complexity of the form that the user needs to fill out. The more questions you ask, the more qualified the lead gets, so you trade off lower price with higher lead quality.

Moreover, apart from the lead quality increase directly inflating the advertising costs, there also is a campaign set-up issue. On certain platforms, you cannot just sign up and start advertising with CPL pricing model. Usually, at first, you have to make your website and lead-generation forms compliant to the platform specific requirements. Furthermore, you still might be required to prove the lead generation capability of your website with the CPC Ad pricing model first, before switching to CPL.

If CPL seems a bit complicated, take a deep breath and welcome the evolved, more sophisticated version of it, the cost-per-action (CPA) model. With CPA, website/app visitors are required to complete a more specific action, or a set of actions, before an advertiser has to pay. For example, such actions could involve visitors adding advertised products to the basket, providing shipping and payment information and finally checking-out. Usually, advertisers are charged ad price only after their desired action (credit card payment) has been made. Sounds great, doesn’t it? Well, all these actions need to be monitored and measured, and setting up analytics properties accurately could become another mountain to climb. Still, the CPA model can be considered the best for motivating immediate action – best use it when you want your customers to buy something right away! That in fact is simultaneously the beauty and the shortcoming of the CPA Model; It is ineffective for industries with a high barrier to purchase, such as financial services, insurance or professional services, while for other industries “buy now” or “act now” might not always be applicable.

However, the main benefit of CPA still holds its ground: you do not have to worry about conversion rates from Impressions to clicks, from clicks to leads, from leads to customers, you only pay for your advertisement if and only if your desired action has been completed. It takes the guessing game away from marketing and makes accounting easier, as you can simply incorporate your advertising costs into the product price. All you would need to do is calculate the revenue that an average customer brings, and determine your profit margin.

Remark: CPA advertising can also refer to cost-per-order (CPO), online lead generation or cost-per-conversion pricing model. In any case, you need to have a track record of proven conversion/purchases to be allowed to use these pricing models, and the action tracking setup would be similar to that of CPL.

Benefits and Shortcomings of CPM, CPC and CPA Ad Pricing Models

A thorough Comparison

Advertising Pricing Models by Digital platforms and Ad Types

Ad pricing models differ depending on ad types, and ad types differ depending on platform. To simplify the decision-making process for you, we are going to discuss ad pricing models by Ad types and On Two major Ad Platforms in the US – Google Ads and Facebook Ads Manager.

We cannot talk about digital advertising without addressing Google Ads. It is a giant in an advertising world that generated $147 Billion revenue last year. And Google Ads did it by offering multiple advertising pricing model options on Google Search, Google Shopping, YouTube and Display Networks, as well as Mobile Apps.

Meanwhile, Facebook generated 50.6 Billion in Advertising revenue via Ads Manager in 2018. Keep it noted, that Facebook Ads Manager unites Advertising options not only on Facebook, But on Instagram, Messenger and Display Partner Network as well (Any article your friend shared on FB feed, and you opened, is opened via Facebook own window and Ads manager can display within article ads that come from it directly rather than from Content Owner. For example, imaging reading The Atlantic, or New York Times article that you saw on Facebook feed and directly opened it, without loading it in default web browser).

For all the platforms Facebook Ads Manager unites, Ad types can be categorized in 2 different Categories – Awareness, Consideration, and Conversion. Under Awareness Facebook offers Brand Awareness and Reach campaigns. While for the Consideration phase, Ads manager has to offer campaigns optimized for: traffic; Engagement, App installs, Video views, Lead Generation and Messages. For the conversion Phase, Facebook Ads manager has 3 options: Conversions, Catalog Sales and Store Traffic.

When to best use each Ad Pricing Model?

The million-dollar question: Overall, which model is the best? – The easy answer is that there’s no easy answer.
And there’s some truth to that. It really depends on your marketing objectives, target audience behavior patterns, competition, and what you are allowed to do using the desired advertising platform. Whichever form of media-buying model you choose, it is critical to set up: unbiased, 3rd party, verified, tracking-and-analytics system to confirm results you drive from each partner or platform.

Keep in mind, advertising platforms and media buying vendors make money by selling ad space! Most of them would reverse-engineer the simplest pricing model (CPM) from whichever different one you might choose. If, for example, your campaign is good at driving clicks, you’ll find more advertisers willing to take CPC bids, because it reverse-engineers into a good CPM. So if you are interested in understanding why your preferred pricing model works the way it does, your task would be to understand how your preferred model reverse-engineers to CPM model on the given advertising platform for the given target audience.

At the end, all companies are looking to drive revenue from their advertising. You need to understand the revenue results of every effort, regardless of how you pay for it.

Ultimately, the best advertising model for you is the one that helps you: drive higher-quality visitors to your business, engage, convert and retain them.

If you get your pick, take a model that has a guarantee of return. Be mindful, CPM can be dangerous because you can burn through thousands of dollars with no visible impact, but remember, it stays at the core of every other ad pricing model. CPA can be dangerous because you can get thousands of low-quality installs. But both models can work if you’re a savvy marketer with good technical understanding.

If you can set up a campaign using CPA advertising model, with a high bounty on an action that indicates high predictive life-time value, take the deal. The question is whether you can get it?! The good all-around option would be CPC. Just try starting with it to test the waters. And if you would ever need to consult an expert, do not hesitate to schedule a conversation with us.