There are three main types of pricing applied to online media purchasing: CPC, CPM, and CPA. If you are a publisher or a marketer, it’s vital that you understand and consider all three.

What Is Cost-Per-Click (CPC) or Pay-Per-Click (PPC) Advertising?

CPC is a pricing model that charges the advertiser every time a user clicks on the ad. Users are not expected to complete the conversion, purchase a product or sign up for a newsletter. They simply have to click. Also referred to as pay-per-click (PPC), it is a performance-based metric. In the CPC model, the payment is not merely based on the exposure of the ad, but on the user interaction with that ad. By clicking on the ad, a user expresses an interest in a given offer; therefore, this pricing model may be viewed as a payment for targeted communication exposure.

Every advertiser is in control of setting the 'monthly budget' and 'maximum cost per click' by keyword. CPC budgets range from $50 to $500,000-plus a month.

ADVANTAGES for the Advertiser

  • The ad receives exposure even without clicks.
  • There is immediate delivery of high-quality, targeted traffic to the website.
  • There is a measurable ROI. You instantly know what works and what not
  • You are in control of the budget.
  • There is a site-blocking filter list.
  • You can use a specific keyword and specific region targeting.

DISADVANTAGES for the Advertiser

  • There can be bidding wars.
  • It is very expensive and requires a moderate budget.
  • There is a high possibility of click fraud, fake clicks, and ghost traffic.
  • It can be blocked by savvy publishers.

ADVANTAGES for the Publisher

  • You can attract more advertisers because ROI is more measurable.
  • You can collect more data about viewers and easily track click-through rates and engagement rates.
  • It is medium risk.

DISADVANTAGES for the Publisher

  • It requires a high click-through rate
  • Not all clicks count.
  • Revenues are less predictable because a publisher never knows how many people will decide to click on the ad.
  • It may take away visitors from your website.

How Much Does a Click Cost?

A click could range from 1 cent to double-digits. For example, Google AdWords charges on average $2.58 per click across all industries on the search network. For the display network, the average CPC is around $0.58. Some of the most expensive keywords in Bing and AdWords could reach up to $50 per click.

For publishers, the CPC depends on the quality of the website, click-through rate (CTR) of the website, coverage of the platform and relevance of the website to the offered promotional materials.

For advertisers, cost per click depends on the type of advertisement, positioning of the ad on the website, the sector or industry being advertised, and the amount of the booked advertising. For instance, clicks on banner ads are typically more expensive than clicks on text links. If the ad appears on the home page, the cost per click will be more expensive in comparison to the sub-page ad clicks. The financial sector is more competitive; therefore, CPC will be much higher.

What Is Cost-Per-Mille (CPM) or Cost-Per-Impression Advertising?

CPM is a pricing model where the publisher charges a flat rate for 1,000 displays or impressions of an advertisement to the audience. That is why CPM is sometimes also called cost per thousand. The CPM model heavily relies on the number of times the ad was shown; it does not matter whether the user clicked on the ad or engaged with it. It is most suitable for display and branding-oriented campaigns. From the publisher’s perspective, CPM is the best choice because of the predictable revenue and measurable results.

CPM protocol typically gives a guaranteed number of impressions, and the cost will be based on that number. If the website has a CPM rate of $5 and guarantees 100,000-page impressions for the advertisement, the cost for the advertiser will be $500.

ADVANTAGES for the Advertiser

  • The lowest cost of advertising, it is ideal if you are on a budget and need predictable pricing.
  • It is easy to implement: Pay for 1,000 impressions, and forget.
  • If the ad generates a high click-through rate, CPM is a low-cost solution.
  • It is good when brand awareness is more important than performance.
  • There is usually a lot of inventory available.

DISADVANTAGES for the Advertiser

  • You are still billed even if the ad may is shown to the same person multiple times.
  • It is a more quantitative benchmark rather than qualitative.
  • In isolation, it does not indicate acquisition.
  • There is a high risk of impression fraud.

ADVANTAGES for the Publisher

  • Comparatively, it is low risk.
  • There are no concerns about CTR.
  • Viewership is verifiable and quantifiable.
  • A fixed price and predictable income stream.

DISADVANTAGES for the Publisher

  • It requires very high traffic.
  • You get low-paying ads.
  • If clicks were generated, they are not paid.

How Much Does an Impression Cost?

The cost-per-impression pricing model is popular for digital advertising due to its efficiency, verifiable distribution and the ability to target precisely. Factors that increase the average cost of CPM include geo-targeting, segment targeting, and type of display (static image, video, expandable, belt, marquee, pushdown). Apart from that, the actual amount of CPMs depends on the placement of the advertising material. According to Facebook, the average CPM in the U.S. for the first quarter of 2016 was $5.45. On LinkedIn, the CPM in the U.S. is around $13.05. The travel sector gets the highest CPM at $7.94, compared to the gaming industry at $3.09. The average CPM rate in 2016 was around $4, which means $2.5 to $6 CPM is a relatively reasonable range for display ads. For comparison, the average TV CPM ranges between $10 to $23 per thousand viewers. For The New York Times website, ads start at $8 CPM and increase by $2.50 for each additional layer of targeting.

What Is Cost-Per-Action, Cost-Per-Acquisition (CPA), Cost-Per-Lead (CPL), and Cost-Per-Installation (CPI) Advertising?

The CPA pricing model is most commonly used in affiliate marketing, it is a cost-per-action model where the payment only takes place when the user performs the action such as installation, click, or converting to the lead. With the cost-per-lead pricing model, advertisers pay when a user views an ad on the website, clicks that ad and then takes further action. Therefore, a user becomes a qualified lead for sale. Cost-per-lead takes the entire process a step further because a user has to complete action on the advertiser’s site. Only then will the publisher receive payment. Advertisers may choose which specific action will be charged: download a PDF, sign up for a newsletter, become a member, watch a video, complete a survey, etc. This metric is defined when setting up each campaign.

CPI  - is a variation of the CPA model, where the costs are transferred for the target action such as the installation of the app performed by the user. Cost per install model is a perfect decision for the app marketers who want to focus on better traffic quality instead of quantity and attract a highly motivated pool of users. The CPI pricing model is specifically popular in the mobile ecosystem because it features a set of competitive advantages. Even though the cost per download is usually more expensive than the cost per click, the budget spending appears to be effective as a client pays for the real user instead of the ad impression.

ADVANTAGES for the Advertiser

  • All of the risks are shifted to the publisher.
  • You pay only for performance, so no action equals no payment.
  • The ad receives exposure even without clicks or actions.
  • It generates sales leads.

DISADVANTAGES for the Advertiser

  • It is the highest cost of advertising.
  • It requires revealing sensitive information.
  • It has the lowest conversion rate.
  • There is a high possibility of ad fraud (e.g. fake form filling).

ADVANTAGES for the Publisher

  • It is a much less predictable revenue.
  • You might be responsible for making the ad program successful and determining the successful time and the place of the ad.
  • There is higher revenue due to the high value to the advertiser.

DISADVANTAGES for the Publisher

  • Clicking on the ad redirects a user to the external page, leaving you unaware whether clicks have converted to a completed action or not. Hence, tracking can be problematic
  • Clicks are not paid.
  • You get free exposure to the ad even if no action is triggered.
  • Advertisers might design ads that don’t convert on purpose in order to get branding for free.
  • There might be cookie fraud, such as the expiration of cookie or deletion of cookie, which means you don’t get paid.
  • It has the highest risk of fraudulent charges.

How Much Does an Action Cost?

The average cost per action on AdWords is $59.18 on the search network and $60.76 on the display network. The cost depends on the business model and industry. For example, CPA for the legal industry is $135.17, health and medical is $126.29, and employment services is $105.79 on the Google search.

So What Does This Mean for You?

CPC, CPM, and CPA all have advantages and disadvantages. When choosing a pricing model, analyze your product and the target audience, then think what will work best for your campaign. You may also try to mix advertising models. Finally, use different models to know what fits better for you, and don’t be afraid to test.

Explore the SmartyAds advertising solution for media buyers and publishers. Let us help you find the model that will work best for you! 

Written by
Irina Kovalenko, CMO of SmartyAds
February 2018