One of the first things you should do when launching an ad campaign is to set its goal. Although the temptation to go to “action” right away is strong, in most cases, it is wise to hold off and start with a less specific pricing model.
Mastering abbreviations like CPM, CPC, CPI, etc., is the key to building an effective top-to-bottom marketing funnel strategy. The goal of this article is to explore all things related to pricing models that will help create a seamless journey that will lead the target audience from point A to point “sale.”
What Is the Pricing Model at Its Core?
To answer this, we need to tackle a more fundamental question, "how is the price for a digital ad determined?" Advertising prices are determined by different metrics, such as impressions, clicks, installs, sales, etc. In turn, metrics are chosen according to the goals of an advertising campaign.
A pricing model measures the cost an advertiser pays and the revenue publisher receives for a specific goal of an ad campaign. The buy-side and the sell-side want to select the most beneficial pricing model; for each participant, it may be different.
Pricing models are generally distinguished by performance (CPA, CLP, CPC, etc.) and viewability. (CPM, CPV).
The Evolution of Pricing Models
In almost 20 years, we went from CPM only to CPC, CPL, CPI, and so on. Today, there are over ten variations of pricing models. However, for the most part, the industry still relies on its most trusted friends: CPM, CPC, and CPA.
The first recollections of pricing models in digital advertising trace back to the era of analog modems and Mortal Kombat 3. When companies realized that they could use this emerging phenomenon — the internet — for advertising, they initially paid a flat fee for online presence, regardless of the results. It was usually a weekly or monthly fee for one banner to stay on a specific website permanently (talk about frequency capping!)
In 1995, a CPM pricing model came around, but it wasn’t until 1996 when Double Click (now Google Ad Manager) was formed and organized the whole online advertising system. Double Click adopted a CPM model as a standard for media buying.
The next big leap took place 5 – 6 years later, around 2002, when the CPC pricing model arrived on the market. To this day, it remains the most popular ad pricing model for search ads.
Due to the increased growth of internet users, digital channels, and targeting options, online ad pricing models had to be rethought. Thus, action tracking flourished and gave life to many performance-based models such as CPE, CPL, CPI, CPV, and so on.
Classic Pricing Models: CPM, CPC, CPA
Despite the variety of available ad pricing models, most marketers still resort to CPM, CPC, and CPA, with a less commonly mentioned model of a flat fee.
What is a Flat Fee?
Flat fee is a pricing model where an advertiser pays a fixed price for the ad placement within a specific timeframe. Unlike performance-based models in advertising, it doesn’t require action tracking software and is quite luring for brands and publishers who want to keep it simple.
Flat Fee Formula
Publisher profit = revenue – expenses
Flat Fee Principle: an advertiser pays a set fee during a set period.
Example: $2,000 per month for a banner ad on the homepage.
Upsides: easy to understand; both the publisher and advertiser know what to expect.
Downsides: (which can also be an upside) publishers and advertisers are limited to negotiated agreements. Performance-based models might have earned them more leads/engagement and money.
Most suitable for: small and midsize publishers through direct deals.
What is Cost per Mille (CPM)?
CPM (cost per mille) means cost per thousand impressions. Mille means a thousand in Latin. It is the grandma of all digital ad pricing models that has been used since advertisers started tracking advertising performance.
This pricing model is most suitable for the top of the marketing funnel when you only attract clients and build brand awareness.
CPM ad campaigns are effective for targeting large audiences. You will be able to reach as many people as possible at the lowest cost.
Cost per Mille (CPM) Formula
CPM = campaign cost / impressions * 1000
CPM Principle: the advertiser pays for impressions regardless of the result. The publisher receives revenue for ad views.
Example: for every 1000 ads viewed by users, a website will earn $10 if it charges a CPM of $10.
Upsides: affordable, a lot of inventory is available for CPM. Hassle-free and predictable in terms of revenue for publishers.
Downsides: CPM-based campaigns do not guarantee engagement or conversions. Also, impressions don't mean unique users and are often subject to fraud.
Best formats: banners, video.
Most suitable for: new product launches, awareness campaigns, or big businesses with products/services that require broad coverage.
In general, the more targeting and parameters you set, the higher the cost per thousand impressions will be. In addition, high-competitive keywords and in-demand industries also add to the pricing.
CPM vs. eCPM: Measuring Averages for Publishers
eCPM (effective CPM) is a metric used to estimate how much revenue publishers can expect from every thousand impressions of their ads. While CPM calculates the cost per thousand impressions (more applicable for advertisers), eCPM calculates revenue for the publishers.
Additionally, eCPMs can be calculated not just for CPM campaigns but for CPC and CPL too. This pricing model also allows publishers to optimize revenue based on the effectiveness of different advertising types.
eCPM = (total ad revenue / total impressions) x 1000
Example: if a website earned $500 per day and got 100 000 impressions on their placements, then their eCPM would be= ($500/100 000) x 1000 = $5
CPM vs. vCPM: Measuring Viewability
vCPM stands for viewable CPM. A viewable impression is recorded when at least 50% of ad pixels are in the user's view for at least 1 second (2 seconds for video).
This pricing model gained popularity as CPM came under scrutiny as a model charging for impressions without knowing whether the user saw the advertisement. The publisher may place the banner in the footer or the sidebar, and the user will not see it, but the impression will still count.
vCPM = (ad spend / viewable impressions) x 1000
What is Cost Per Click (CPC)
CPC is a performance-based pricing model where the advertiser pays and the publisher receives revenue when the user clicks on the ad (regardless of how many times the ad has been shown).
CPC campaigns are likely to appear in the middle of the marketing funnel when users are already familiar with the product, as CPC ads aim to engage the audience. By knowing how many visitors clicked on your ad and at what cost, advertisers can adjust their campaigns more effectively.
Cost Per Click (CPC) Formula
CPC = campaign cost / clicks
CPC = (CPM / 1000) / (CTR / 100) = (0.1 * CPM) / CTR
CPC principle: advertisers pay publishers only when visitors click on their ads. The cost of clicks varies from industry to industry, but they are usually higher in more competitive markets, such as dating, finance, etc. For top websites, prices may range from $0.10 to $0.40.
Example: if you have 30 clicks at $0.3, 15 clicks at $0.5 and 5 clicks at $0.7, then your CPC will be: (30*0.3) + (15*0.5) + (5*0.7) / 50 = $0.4
Upside: high viewability rate, measurable, cost-effective.
Downside: calls for high optimization skills and time investment
Best formats: push ads, pop-ups, native banners.
Most suitable for: ad campaigns that need interaction, affiliate marketing program, and sponsored social media posts.
The cost of online advertising does not only vary from platform to platform but also from industry to industry. For example, the average cost per click in most verticals rarely goes up to $4, but in more competitive industries like insurance and law, it can reach $50.
What is Cost Per Action (CPA)?
Cost per action is the advertiser's favorite pricing model and probably the least favorite for publishers. CPA is also the most effective and advanced way to generate user actions.
Now, the action doesn't necessarily mean purchase. Common actions are conversions, subscriptions, installs, and so on. While they can all be measured separately, they are all viewed as actions in a broader sense.
Users rarely "take action" when they see an advertisement for the first time. The bottom of the funnel is typically reached after running campaigns for other targets, such as CPM and CPC. This sequence helps to gather historical data and thus makes targeting and retargeting for "action" more effective.
Of course, advertisers can run CPA ad campaigns= without historical data, for example, for non-expensive time-sensitive products.
CPA is the most fraud-free digital advertising pricing model, as high-quality traffic is more protected from bot farms, ect.
Due to its high value, CPA is also the most expensive ad pricing model.
Cost Per Action (CPA) Formula
CPA = campaign cost / conversions
CPA principle: advertisers pay only when the user takes action, such as a subscription, sale, etc. Publishers get paid only if a conversion occurs.
Example: average CPA for 2 conversions of $3.00 and $4.00 will be (3+4)/2 = $3.50.
Upsides: risk-free and cost-effective for advertisers. Having high-quality traffic can generate good revenue for publishers and attract more advertisers.
Downside: expensive for advertisers. This pricing model isn't popular with publishers because actions are less predictable than CPM or at least CPC.
Best Formats: social bars, push ads, interstitial, native, playable ads.
Most suitable for: motivating immediate action, affiliate marketing.
In addition to changing from industry to industry, your cost per acquisition may also vary by month or season. Summer is typically slower, while Q4 is a time for action. But it is also more competitive. Consider investing in leads during low seasons and then taking advantage of them during high seasons.
CPA vs. CPC vs. CPC vs. Flat: [Quick Comparison Table]
|Advertisers pay for every 1000 impressions.
|Advertisers pay when visitors click on their ad.
|Advertisers pay only when a subscription, sale, or other action is taken.
|Advertisers pay a fixed price within a certain timeframe.
|Publishers are paid for every 1000 impressions served on that ad.
|Publishers are paid for each user click on the ad.
|Publishers are paid when a conversion (install, sale, etc.) occurs.
|Publishers are paid a fixed fee for a certain period an ad will be shown on their inventory.
|CPM = campaign cost / impressions * 1000
|CPC = campaign cost / clicks
|CPA = campaign cost / conversions
|Publisher profit = revenue – expenses
|Most suitable for
|Branding and awareness campaigns. For example, new product launches.
|Performance-based campaigns. For example, affiliate marketing and sponsored social media posts.
|Campaigns that motivate immediate action. For example, flash sale or app subscription.
|Campaigns that bring guaranteed KPIs. Works with trusted small and midsize publishers.
|Place in the marketing funnel
|Top and Middle
Less Common Digital Advertising Pricing Models
CPM, CPC, and CPA are the most popular pricing models in the ad tech industry. Even so, a few less commonly used and more niche strategies for measuring digital advertising are worth mentioning.
CPL – cost per lead. CPL is common in B2B marketing, where a purchase is unlikely to occur immediately.
CPI – cost per install. This one is most suitable for mobile apps advertising.
CPS – cost per sale. While CPA requires an action, it doesn't specify if it's a sale, install, etc. Therefore, publishers with valuable inventory usually want to guarantee revenue and go for the CPS.
CPV – cost per view. This model is popular in video advertising and is also known as pay-per-view (PPV). An advertiser pays each time a video ad is viewed.
CPE – cost per engagement. One step down from a CPA in terms of performance tracking lies in engagement performance. CPE works particularly well with apps.
While niche pricing strategies may seem like the answer to your digital campaign problems, setting them up is usually time-consuming and costly.
Which Ad Pricing Model is Best for Advertisers and Publishers?
“Publishers have historically used the CPM model. Even when they know they receive payment for conversions, they still calculate the results in eCPM. Alternatively, advertisers have very precise KPI for their ad campaigns. They prefer qualitative pricing models, such as CPC or CPA, requiring ad networks not only to “spend the budgets” or “ensure audience reach” but to generate new leads and boost sales. Ad networks are tied between advertisers and publishers. Having at their disposal a platform that ensures the KPIs of advertisers, and then translating it to the publishers’ CPM “language” is all they can ask for.”
Bottom line: Set your goals straight before choosing a pricing model. Keep in mind, however, the ever-present difference in interest (desired metrics) between the sell and buy sides.
You can opt for the CPA for short-term goals and time-sensitive products that are not very expensive. While, if you have time to gather the data and work the marketing funnel from top to bottom – start with the CPM and work your way down to the CPA. This classical approach will give you more insights along the way.
FAQ: Pricing Models Gist in 5 Questions
What are pricing models in digital marketing?
A pricing model measures the cost an advertiser pays and the revenue publisher receives for a specific goal of an ad campaign.
All payment models are tied to specific performance indicators, such as clicks, sales, number of impressions, and so on. The most commonly used pricing models are CPM (cost per thousand impressions), CPC (cost per click), CPA (cost per action).
What are CPM, CPC, and CPA?
CPM (cost per thousand) indicates the cost per thousand impressions.
CPC (cost per click) indicates the price the advertiser pays and the publisher receives for each click.
CPA (cost per action) indicates the amount the advertiser will pay to the publisher for each action. However, action can be anything from leads to sales.
Which ad pricing model is best for advertisers and publishers?
Typically, publishers prefer CPM, as this is the simplest pricing model that requires minimum participation on their part. On top of that, it is easy to track.
Advertisers prefer more performance-based models, CPA, in particular. As it makes it easier to achieve their KPIs.
Which pricing model would be best suited for a branding campaign?
CPM is the best pricing model for any type of campaign that requires broad audience coverage. This viewability-based model ensures your ad campaign is seen by as many people as possible (though not necessarily unique users).
Why is pricing strategy important?
Pricing models are essential for you to achieve your ad campaign goals. Ad campaigns that call for action from audiences unfamiliar with your brand/product, even with the best creative, can drain your budget. And vice versa, if you are going to show a 250 × 350 banner to a very warm audience that is ready to buy, you will miss a lot of action opportunities.
Epom supports classic models plus any custom model based on a custom action. Set your own pricing rules today:14-Day Free Trial