The Price Is Right

What’s the right way to price Internet ad inventory? Cost per thousand, a flat price for the length of the ad run, a fixed cost per click, or some variable on revenue share on a near-term or eventual purchase of a product?

What about slotting fees for merchants, or so-called “editorial charges” for sponsored content?

Today’s column launches a series on the most prevalent pricing strategies. Over the next few weeks, I’ll discuss some realities, advantages and disadvantages of each, for both publisher and advertiser.

In an industry notable for its passionate opinions on even the smallest details, it’s no surprise that advertisers and media both argue brilliantly and persuasively about the “right” way to value advertising inventory. Lots of folks have a point of view about how they would like to see this market evolve, and pricing strategies figure significantly in many of those visions.

Let’s start with the basics. Media properties have established a standard in cost per thousand pricing, and many leading Internet sites price and sell ads that way. CPM (where “m” is the Roman numeral for thousand), as every ClickZ reader knows, is the price for each thousand individuals reached. In traditional media, this refers to the total audience of a medium. On the web the “m” in CPM generally refers to the number of impressions served. This may seem an insignificant difference… Don’t be fooled!

Contrasting CPMs across media types means comparing very different data. The audience or total readers of a newspaper is not the same as the number who read page 53, and the number of viewers of a TV show is not equal to the number who stay in the room to watch a given commercial.

Media pros in traditional media have formulas for estimating how much of the audience will actually be reached with a given ad. The ad buy online is based on the number of folks who actually called up a given page on which the ad is placed, meaning that online ad prices come much closer to charging for actual humans reached, rather than total possible audience. Big difference!

Cost per impression, or CPI, is the same metric. Just divide the CPM by 1000 and you get the cost per impression, where your focus remains on audience exposed to an ad.

CPM and CPI pricing make the most sense when each viewer is valued by the advertiser, where branding or awareness are among the ad’s objectives, and where the creative is designed to have an impact just by being seen. Charging for ad impressions served makes the most sense for those site publishers whose value proposition features the ability to attract a qualified and desirable audience, and who prefer to be compensated for delivering that audience, irrespective of whether an immediate action is taken.

The paradigm starts to shift as you move away from CPM to any of the many different cost per action models, and the pricing for performance models is becoming more common throughout Internet advertising.

Next week’s column will address the growing trend to CPA pricing, the range of options possible, and what those options mean for publishers, advertisers and their agencies.

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