CPM vs. CPC vs. CPA

For those of you that have been using the Internet as an advertising medium, you know that there are various pricing models available to you. However, there are a lot of people just entering the fray and so I thought I'd take a quick look at the 3 categories that cover 99% of the advertising currently in use. The oldest is the cost-per-thousand (CPM) category. More recently, cost-per-click (CPC) stepped in to the ring and currently, in my opinion, holds the crown for being the most effective. And the newest is cost-per-action (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-Action
CPA then seems to offer the best guarantee for advertisers. After all, with such a set up, the advertiser only pays when the prospect has performed a specific action such as registering or requesting information. And just to be explicit, 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 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 most 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. These CPC campaigns are so successful that there has been a measurable shift in advertising spend with more and more going toward the online world.

The one 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. Still, Google has done a good enough job of combating this fraud that there has yet to be any sign of slowing in the number of advertising dollars being pumped in to CPC.