How to choose advertising pricing model

How to Choose the Right Online Advertising Pricing Model?

How to Choose the Right Online Advertising Pricing Model?

Online advertising is currently taking over the industry, striking offline media channels with huge numbers. According to the pre-COVID forecasts, global digital ad spending estimated to be some
$333 billion. SME owners heavily rely on digital ads, both search and display.

As a result, the advertising infrastructure has snowballed — new ad platforms, buying, and pricing strategies emerged at a rapid pace. If you are new to promoting your business online, making sense out of CPC, the CPM business model, CPA, and other pricing strategies is challenging. On the other hand, it’s vital to choose the right pricing strategy since it directly affects campaign spendings.

In this post, you will be introduced to popular advertising strategies, their pros and cons, and find out which one is the best fit for your next campaign.

What Are Digital Advertising Pricing Models?

An ad pricing model is a system a publishing platform chooses to charge an advertiser for displaying an announcement. The nature of a pricing model often hides in its name: for example, cost-per-click literally means you will be paying for every user that clicks the ad.

How come there are so many pricing strategies? It all started in the nineties when Netscape and Infoseek adopted cost-per-mille (paying for every 1,000 impressions of an ad) advertising.

In 1998, Goto.com, a search engine, adopted a pricing model similar to cost-per-click. However, CPC became a standard four years later, when officially adopted by Google.

Since the growth of Facebook and other social media platforms, more online ad pricing models have come to be — cost per engagement, cost per follower, or cost per view. Advertising platforms adopt all these options to give business owners more flexibility and help avoid overpaying.

Pricing model Meaning
CPC (cost-per-click)
An advertiser pays for every click on the announcement
CPM (cost-per-mille)
An advertiser pays a fixed rate for every 1,000 impressions of the ad
CPA (cost-per-action/acquisition)
An advertiser pays for visitor’s actions after clicking the ad (filling in the contact form, downloading an application, etc.)
CPF (cost-per-fan)
Popular on social media, this is the form of online advertising where a business owner pays for every subscriber on the corporate fan page
CPI (cost-per-install)
An advertiser pays every time a person installed an application after clicking an ad
CPV (cost-per-view)
A pricing model for video content

While you should be able to explain all the digital advertising pricing models above, more often than not, only the first three (CPC, CPM, and CPA) are the most frequently used ones. That’s why we decided to examine them in more detail — you’ll find out how the campaign cost is calculated, as well as the pros and cons of each model.

CPC Pricing Model

By definition, the cost-per-click pricing model means that a business is charged for the number of clicks on the announcements. Keep in mind that the CPC pricing model will count the number of clicks regardless of whether or not you convert a visitor into a client.

Use cases: CPC is primarily used to test new ad campaigns since you don’t have to pay for every impression. In case the copy or the visual doesn’t resonate with the audience too well, there won’t be many clicks, and the ad budget will not be affected.

Average CPC costs: to connect with prospective clients, business owners use keywords. Depending on how precise, high-frequency the keyword is, and the location marketing managers chose for targeting, the cost per click will vary from $0.50 to $50. As for Google Ads, the most common platform for CPC ad hosting, the average CPC for search ads is $2.76 in most fields.

Benefits of using CPC (PPC models)

😊 Since the platform you are promoting the business on will be interested in charging you, the algorithm will show the announcement to relevant visitors, improving the campaign efficiency

😊 CPC gives a solid understanding of the ad’s performance. By tracking how many people click on your content, business owners can get a deeper understanding of the target audience (chances are, you are targeting the wrong one) and the quality of creatives. 

😊 Broad campaign settings. Most CPC platforms are highly flexible when it comes to a campaign set up — you can choose the region, define demographic parameters, interests, and behaviors, to reach out to the most relevant audiences for the niche. 

😊 You can get exposure to the campaign without paying a cent. Even if nobody clicks on the ad, social media or search engine visitors might still remember your offer unconsciously and be more tolerant of the company when you follow up via email or a different communication channel.

Drawbacks of using CPC (PPC)

😟 Generally, CPC ads are quite expensive. If you want to reach a high KPI, getting as many clicks as possible will be your marketing team’s top priority — however, since you will need to pay for each website visitor, at the end of the day, the ad spend will bloat a great deal. 

😟 Seasonal bidding wars. It’s not a secret that median costs per click aren’t constant. While there are lucrative low-traffic periods (like June, July), the Thanksgiving-Christmas gap is a shopping season — thus, a lot of business owners start buying online ads. Due to the skyrocketing demand, the average cost-per-click will grow, increasing your overall ad spending. 

😟 There’s a room for fraud when an advertiser cooperates with unreliable publishers. Some may face ghost traffic (fake clicks) that causes budget losses. That’s why the ad market is saturated with expert reviews on the ad networks and traffic sources they offer. It is worth drilling into some overviews and ratings to find out more. 

CPM Pricing Model

CPM formula

For English-speakers, the concept of CPM might be confusing since “cost-per-mille” doesn’t tell us much. However, as long as you remember that “mille” stands for “thousand”, the CPM definition becomes quite clear.

The CPM pricing model allows advertisers to handle payment via a flat rate for every 1,000 impressions of an ad, regardless of the number of announcement clicks.

Use cases: if a business owner is confident in the quality of the ad’s creative content, CPM is the most fitting advertising model for a campaign since you can get hundreds of clicks that are much cheaper than the CPC ones.

If a brand manager launches a branding and display-oriented campaign, choosing the CPM pricing model is reasonable since the algorithms of the publishing platforms will be geared towards maximizing the number of ad impressions.

Average CPM costs: like with any form of online advertising, the keywords and location you choose for promotion will influence the campaign’s CPM. As for the average social media cost-per-mille, business owners pay $7.19 on average on Facebook, $6.59 on LinkedIn, $9.68 on YouTube. 

Benefits of using CPM:

😊 Perfect for low-budget campaigns since it’s the cheapest advertising pricing model. 

😊 Makes it easier to predict total campaign spends since publishing platforms typically offer accurate estimates on the number of daily impressions. 

😊 A powerful pricing model for skilled ad creators since you don’t have to pay more if more website visitors are interested in the ad. 

😊 Improves brand awareness. With the CPM model, your campaign will get more exposure — thus, more people will hear about the company.

CPM disadvantages:

😟 An advertiser needs to establish clear limits of the number of impressions per visitor — otherwise, an uninterested person might see your ad multiple times, increasing the total spend. 

😟 Even if the ad performs poorly and generates no traction, an advertiser still has to pay for impressions. 

😟 Similarly to CPC, traffic manipulation is a significant concern in cost-per-mille advertising — to maximize ad revenue, publishers might show your creatives to irrelevant audiences. Leading ad networks are successfully preventing this by verifying traffic sources and anti-fraud checking.i

CPA Pricing Model

CPA formula

CPA is common among advertisers since, after choosing the model, business owners only have to pay for the final, revenue-generating action — be it an app installation, filling in the contact form, or subscribing for the product’s demo version.

When setting up a cost-per-action campaign, advertisers will be asked to define a conversion point. 

The CPI pricing model (cost per install) is a modification of CPA used by mobile app advertisers — this one charges for the number of app installs.

Use cases: CPA pricing model is commonly used in affiliate marketing, allowing advertisers to pay for revenue-generating user actions rather than clicks or ad impressions.

CPA advertising costs: as a rule of thumb, out of all online advertising pricing models described above, CPA is typically the highest. For instance, you will have to pay about $59 per converted user on Google Adwords, $135 if you work in the legal field, and $126 for healthcare businesses.

Advantages of using CPA:

😊 No-risk pricing model, you will be paying for a defined result. Moreover, with self-serve platforms like Adsterra CPA SSP, you’re controlling the whole process from defining a target action to real-time editing of your campaigns. 

😊 You get free exposure — even if the ad is displayed thousands of times, you don’t have to pay as long as there aren’t any conversions. 

😊 CPA advertising gives business owners a clear understanding of how many leads every promotion channel generates.

Disadvantages of using CPA

😟 More expensive than other pricing models.

😟 CPA ads reasonably have lower conversion rates.

How to Choose the Perfect Online Ad Pricing Model for Your Business

  • Campaign objectives

    If a marketer wants to attract more website traffic, CPC ads are the best pricing model for the objective. For brand awareness campaigns, business owners should choose CPM instead — this way, thousands of Internet users will see the ad. If a business owner wants to acquire users who fill in subscription forms, download the product’s demo, etc., CPA is the most conversion-driven pricing model.

  • Campaign budgets

    For low-cost ad campaigns, CPM is the best option since, generally, this pricing model is the cheapest one. CPA is the most expensive advertising model — that’s why it is usually preferred by large-scale brands who prioritize fast conversions over ad spend.

  • Confidence in the ad content

    To test the relevance of the announcement, choose a click-based pricing model. If the ad doesn’t perform well, there will be no clicks. While you will not be able to get any website traffic, you won’t have to pay a cent either. If an ad resonates with users exceptionally well, business owners should choose CPM over CPC — this way, they will pay a cheaper flat rate for impressions and will not be charged for every click on the ad.

  • Advertising channels

    If you are promoting on Google, the CPC model is the most efficient model. For social media, choose CPM since the content engagement (hence, the number of clicks) is typically high. For affiliate programs, stick to cost-per-acquisition to lower the risk of ad overspend.

Digital Advertising Pricing Models of the Future

As new promotion channels and ways to interact with sponsored content appear, new pricing models for online advertising will be needed as well to let advertisers connect with prospective clients. What lies ahead for ad pricing models? Let’s take a sneak peek in the nearest future:

  • Traditional models will not disappear but they will become more refined. CPC and CPM pricing strategies will remain — however, they will become more risk-free. For instance, more publishing platforms are shifting from cost per mille to CPVM (cost per viewable impression).
  • Advertising pricing models will become more user-oriented. Rather than passively paying for ad impressions, business owners would be able to specify desired engagement and pay to achieve a specific outcome (be it an app install, a video view, leaving a comment, etc).
  • Publishers will be able to forecast the campaign’s final cost and conversion rates more precisely. Facebook and Google already generate estimates of how many clicks an advertiser can get on a sponsored post. Soon, the accuracy of these predictions will be unmatched thanks to AI tools that assess the quality of the ad, data gathering and processing tools, and machine learning algorithms. 

Final Thoughts

With its flexibility and relatively low costs, online advertising is highly convenient for SME owners. However, being able to customize ad campaigns comes with responsibilities — you need to decide on the right pricing strategy before launching an ad.

Although there are dozens of pricing models different platforms provide, CPC (cost-per-click), CPM (cost-per-mille), and the CPA model (cost-per-action) are the most common. Before choosing one of these, decide on the campaign objectives, define the advertising budget, and assess the quality of your ad.

Making an informed ad pricing strategy decision will help you reach business goals faster and more efficiently, without spending an extra cent.

Adsterra Ad Network offers the most demanded pricing models: CPM, CPA, CPC, CPL, CPI (PPI). One of the popular payment models for display ads is CPM. On a par with the pricing model, business owners can adjust and fine-tune targeting options: GEOs, carriers, OS types, etc. Depending on the vertical and the final campaign goals, ones can profit from impressions, others from revenue-generating actions.

It could be tricky for the newbies to balance the targeting and the bid amount, as the narrower the targeting, the higher the bid. Adsterra’s managers will masterfully assess your offers and advice on the perfect and balanced strategy and won’t let the pricing models trip you up 💪

Explore the high-quality traffic from reliable publishers and launch lucrative campaigns.