The complexities of costing online ads

Digital advertising seems simple at first blush, with a relatively straightforward and well established model for pricing display adverts in the form of CPM or cost per mille (thousand impressions).

But scratch a bit deeper, and you'll find a range of complexities that mean it is not always easy to determine a fair price for an ad compared to the potential value it will deliver.

In the CPM model, your online ad will be displayed 1,000 times for the rate of one CPM. In other words, if the publisher charges R250 CPM, you'll pay R250 for your ad to be displayed 1,000 times. There is no guarantee implied that the impressions will be served to 1,000 unique users; furthermore you're paying for the ads to be displayed rather than clicked on.

This pricing model isn't unique to digital advertising - radio, television, newspaper, magazine and out-of-home advertising space can also be purchased on the basis of showing the ad to a thousand viewers. It's an intuitive and easy way to calculate the cost of a campaign or message in a given medium.

Determining the value of the CPM

The core of the CPM model lies in determining the value of your ad being displayed 1,000 times for the price you pay. The sheer number of choices and methodologies for benchmarking value can become overwhelming when trying to get the best value for your advertising budget.

There is a great deal of variance in the average CPM rates for different types of banner ads and various targeting strategies. Ad networks may offer you CPM rates of only R15, but the ads will be untargeted and you'll have little data about who exactly you are talking to.

More targeted banners - which allow you to target people according to factors such as geographic location (inferred from IP addresses), time of day, and online behaviour - are far more expensive.

They may have CPM rates ranging from R250 to about R450, with an average of about R350. Highly targeted multimedia banners aimed at a specific audience on specialised, high-traffic sites may fetch a CPM rate of up to R500. But they may provide more valuable engagement and conversions than the untargeted buy, albeit at the cost of shorter reach into the market.

Wide range of factors

CPM for banner ads may vary according to a wide range of factors, including the size of the banner, placement (above or below the fold), targeting, saturation, website content and the audience being targeted. Multimedia banners that feature animation or video perform better, but are more expensive.

Publishers with highly targeted niche audiences usually have higher CPM rates than general audience publishers. An audience's demographics - including median age, gender skew and average disposable income - also impact the value of the website's ad inventory.

Content also matters. Banner ads are most effective when displayed on websites that contain relevant content to the ad's message. For example, a banner for a car dealer will perform better in a content environment focused on the automotive sector.

In general, parenting, health, and automotive placements with niche, limited inventory will generate higher CPM rates than general news, entertainment or lifestyle portals with plenty of traffic.

So, direct comparisons between advertising opportunities can be challenging.

Do you want scope to build brand presence with mass reach, or do you want conversions by engaging with a highly targeted audience? In the first case, you might go for the ad network that can give you plenty of impressions at a low cost, while a high quality publisher with a clearly segmented audience you can target might work best in the second instance.

Alternative models

In addition to CPM, cost per click (CPC), cost per lead (CPL), cost per action / active / acquisition (CPA), and hybrid pricing models are all part of online pricing negotiations these days. Advertisers and publishers, need to know when and how to use each of these as well as what their pros and cons are.

Ideally, advertisers and publishers should split risk and benefit as evenly as possible. As a rule of thumb, CPM works best for visual, branding-oriented campaigns, while CPC is worthwhile for contextual, responsive campaigns. Making the right choice could spell the difference between the success or failure of a campaign.