Online Advertising Models
Online Advertising Models and Which Method Does WhyZoom Utilize?
For those who have been utilizing the Internet as an advertising medium, you know that there are various pricing models available to you. However, there are many people and companies just entering the fray. Therefore we thought it would be wise to take a quick look at the four models that cover 99% of the advertising currently in use. The oldest are the Flat Rate Ad Placement and Cost-Per-Thousand (CPM) model. More recently, Cost-Per-Click (CPC) stepped in to the ring and the newest is Cost-Per-Acquisition (CPA) which is still in its infancy.
Cost-Per-Thousand
CPM pricing was actively promoted by the big portals such as Yahoo and AOL. It was a great revenue generator for them that had the added bonus of being largely risk free. That is, the advertiser did all the creative work and made the payments while the only thing the portals had to do was display the ad as often as they could until the advertiser's budget was exhausted. It's this one-sided nature of the CPM model that has pushed advertisers to seek an alternative that can offer them some sort of guarantee of performance.
Cost-Per-Acquisition
CPA seems to offer a better solution for advertisers. In this model the advertiser only pays when the prospect has performed a specific action such as registering or requesting information. The upside of this is that an ad can be displayed and clicked on many, many times with no cost to the advertiser. The problem here is that now all the risk has been shifted to the publisher since they now must give up their ad inventory and hope that the advertiser's message is compelling enough to result in "actions".
Cost-Per-Click
CPC sits in the middle of the online pricing spectrum. It involves risk from the advertiser's side in that they pay for every click on their ad. This forces them to make sure that the ad is relevant to what is being offered so that a click has a good chance of turning in to an action. At the same time, the publisher takes on the responsibility of displaying the ad in appropriate places so that it will receive clicks. No clicks, no revenue. It's a seemingly very simple formula for both sides.
This sharing of risk and the simplicity in measuring performance is why CPC has become so popular. It has been so wildly successful that Google generates much of it's billions in revenue by playing the middleman between advertisers and publishers. In the case of the ads on the search engine results, Google actually is the publisher. An entire industry has sprung up around this model where big name companies pay search engine marketers to handle their advertising campaigns.
One consistent problem with cost-per-click type ads is that they're subject to click fraud. That is, it is possible to build networks of people that click on ads with no interest in the product or service being sold. The motivation behind such activities can be to drive up advertising costs to force certain companies off the playing field or it can be an attempt to generate revenue by clicking on ads that appear on a publisher's site that is involved with the fraud.
Flat Rate Ad Placement
Flat Rate Ad Placement represents the oldest and most basic online advertising methodology. Under this model you rent advertising space at a fixed rate for a specified period of time. this method is most similar to traditional billboard or classified ads. Although this may not be the most widely utilized method of advertising online today it is the method that WhyZoom employs when an client is interrested in placing an ad on one of our sites. The reason for adopting this method is threefold. We want to minimize the risk to our clients. We want to minimize the risk of the company. We believe our fixed advertising rates are exceedingly fair given our targeted markets, quality of traffic and traffic volumes.
The Problems of CPA Advertising:
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Difficult to manage; balancing the risks of advertisers and publishers against each other makes the CPA model the most difficult to manage. Publishers should be responsible for influencing the consumer, not closing a deal too.
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Not immune to gaming; CPA might prevent click fraud, a major issue with CPC model currently. But soon enough, there will be people will who will figure out ways to cheat CPA too.
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Suitable only for medium/large businesses, because small businesses can't afford to pay relatively high CPA premiums to publishers (see this post by Seeking Alpha for more context).
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Ignores the value of brand building.
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Immature tracking technology; the CPA model may yet be unsuccessful too, because the tracking technology hasn't yet matured into something so robust and reliable that it would enable a vast number of affiliates to be utilized.
Reasons why publishers dislike the CPA Model
While CPA is ideal for advertisers, publishers won't prefer this model for the following reasons:
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Most financial risk; if an advertising campaign fails and generates no response, the publisher receives no remuneration for displaying the advertisement.
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Low Earnings; in most cases, the revenue generated through a CPA deal works out to be the equivalent of a very low CPM.
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Tracking discrepancies; publishers are often reliant on the advertiser's figures, to calculate the number of actions generated from the campaign.
The Problems of CPC Advertising:
As we discussed above, one of the consistent and well documented problems with cost-per-click type ads is that they're subject to click fraud. That is, it is possible to build networks of people or bots that click on ads with no interest in the product or service being sold. To illustrate this challenge we have included a number of related articles:
The dark side of online advertising
The Problems of CPM Advertising:
Although the challenges of CPM were briefly discussed above, we have included a number of related articles below. The two most prevalent problems with CPM advertising involve two different types of impression fraud.
In the first type, the website inserts your advertisement everywhere possible which quickly exhausts your advertising budget. If you have ever been to a website whereby you have clicked on an image, and that singular image is surrounded by ads you'll know what we mean. The goal of this type of impression fraud is to quickly get you to your 1000 impressions.
The second type of impression fraud commonly associated with CPM is no less insideous and is best illustrated by this rather comical article by Ron Arthur:
Impression fraud is a special case of click fraud. The prototypical impression fraudster is the competitor who resorts to unfair means to gain an advantage. His primary motivation is to reduce the ranking of his competitor, and then save himself money by inserting his own ad at a lower rate. Another possible motivation may be a hit-and-run operation(random act of violence). Given the potentially devastating consequences it could have on a person's web site return on marketing investment, it could even be a disgruntled employee.
To illustrate the mechanics and motivation of Let's call this individual Grinch. Assume that Cindy Lou(our protagonist) has an advertisement for Christmas trees running on google ad words. Cindy Lou's Pay Per Click advertisement has been doing rather well, getting a lot of click throughs. She doesn't have to bid a whole bunch to rank high on the sponsored links because the position is a function of bid price and Click Through Ratio. She is getting decent traffic through her PPC campaign. The traffic is very focused, a large number of visitors end up converting. The trees are moving off the lot and things are shaping up rather fine. Grinch too has an advertisement running. Unfortunately (for Grinch), his advertisement is not getting a lot of clicks. In fact, his CTR is so dismal that he has to pay ever increasing sums just to keep it displayed. His ROI is not that great given his higher cost base for the PPC bid. He does not like the fact that Cindy's campaign is doing rather well. Not one bit! So he does something devious.
Grinch toggles off his own PPC ads and then does a lot of searches for keywords appropriate to Christmas trees. He searches on google, and asks his friends to search too. Only he never clicks on Cindy Lou's ad. He runs his campaign for a few days, and Cindy sees her CTR go down and she is at the bottom of the heap. It's now down to a level where Grinch sees a level playing field and steps in toggling his PPC ad back on. Grinch is suddenly back in business, while Cindy has to keep up somehow. Remember, it's almost November and she has to sell off her trees rather soon. Anecdotal evidence suggests that the loss from this activity may well run into thousands of dollars for larger advertisers(maybe when Cindy Lou Trees Inc. goes nationwide).
Reference Articles:
Impression spam defined
What is Impression Fraud?
Microsoft: Pay Per Percentage
Is Impression Fraud More Dangerous Than Click Fraud?
With an understanding that detail matters and the experience to back it up, we at WhyZoom welcome the opportunity to work with you.
If you are interrested in advertising on one of our web properties or you have search engine consulting needs, Please contact Chris or Tracey.
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