The banner advertising industry is still very much in its infancy. Standards and pricing models are now only emerging after heated debates on whether branding or direct response models should be used to calculate the pricing of banner advertisements.The foundation of banner ad pricing (Cost Per Thousand) is based on the traditional broadcast model where pay per performance pricing is relatively impossible. With broadcasting, it is only possible to estimate the number of consumers that view the advertisement by using ratings which base their results on sampling. And since the medium only goes one way, consumers have to use a different channel to act upon the desire created by the advertisement. Therefore marketers can only estimate, not accurately measure the effects advertising on the target market.The Internet brought interactivity to both consumers and marketers. Now marketers can not only accurately measure the number of consumers who see the advertisement, they can measure the response of the consumer to the advertisement from clicking on the banner, to interacting with the website, all the way to the sale. This functionality provided marketers with the ability to address the return on investment of the campaign and brought with it direct response models to banner advertising (Cost Per Click, Cost Per Action, Cost Per Lead, Cost Per Sale.)However, marketers are beginning to realize the benefits on banners on branding and see that click-throughs are just one measurable action of the target market to the advertisement. Banners can develop, change or lock a perception about the brand in the mind of the target market without ever clicking on the banner. Therefore the number of times that the banner is displayed (Cost per Thousand) is being used to estimate the effects of banner advertising on branding.The effects of banner advertising on branding can, however, be measured using a direct response model. This would involve using cookies (putting a tag on the consumer every time they see an advertisement) to track the number of times they see the banner ad. When the consumer enters the website, and/or generates a transaction the advertisers could compensate the publisher(s) of the advertisement based on the number of times the consumer viewed the ad. This model has not been used on the Internet to our knowledge. It has been developed by Channel One to provide an alternative to the CPM model for branding.However, there will still be opposition to direct response models from publishers on the grounds that they cannot control the creative, the offer or the product being advertised on their site. This will change, in our opinion as the market becomes more educated and publishers realize the substantial revenue that can be generated from tracking the advertisement to the sale.
In conclusion smart advertisers and smart content owners now realize that it is important to choose the right advertising model in order to maximize return on investment. This will involve choosing a hybrid model that measures the effects of each variable within both performance based and CPM models. The winners will be those who choose the most profitable equation to determine the advertising strategy.Break down of Banner Advertising Revenue by Model4.1 Cost Per Thousand (CPM)The CPM (M being the Roman numeral for thousand) model allows the purchase and sale of banner advertising based on the amount of times the banner advertisement is displayed. Each time a user views a page that contains the banner ad counts as one impression. Banners are sold by the impression in packages of 1000.4.1.1 RatesThe industry average CPM, according to software firm AdKnowledge, in September 1998 was US$36.29 CPM (which means it costs $36.29 to buy one thousand impressions). The figure is the lowest since they began tracking this data in December 1997 when it was $37.21 CPM. It has fallen $1.55 to $37.84 CPM since May ’98. However, the market is still very fragmented and unsold inventory is auctioned off for as low as $3, while banners on highly targeted sites can be sold for up to $150.CPM is currently the most popular model for banner advertising. It is used by content owners and banner networks who see their role as providing targeted audience for their advertisers. Many use this model because they do not want to get involved in the advertisers marketing objectives and argue that they do not have control over the creative (banner ad) the website (the pages the customer reads after clicking on the banner, the offer, the product or the company (the advertiser).CPM is the best model in existence that can be used to measure the effects of branding. It allows the marketer to compare available media on three variables: the place (publishers site), the people (audience) and the price (CPM).
The information gained from the comparison is used to forecast the effects of branding. It can also be used in conjunction with other models to forecast the return on investment.4.2 Cost Per Click Through (CPC)The CPC model allows the purchase/sale of banner advertisements based on the cost for each individual who enters the advertisers website to find out more information as the result of clicking on a banner.CPC bought by click through networks such as ValueClick from media and content sites is $0.12 to $0.16 This means that they pay the media site 12 to 16 cents for each individual who clicks on the banner. This is an increase of $0.06 from last year. However the market is still very fragmented and CPC can range from 5 cents to $2 depending on the industry.CPC is a pricing model developed in demand to the users need to know the return of investment before they execute a campaign. It’s main flaw is that most banners are bought by CPM. Publishers can forecast the revenue generated from a campaign quite accurately dividing the number of banners by the industry average click through rate, which according to NetRatings is 0.7 percent. This means that 7 out of every thousand banners impressions are clicked upon. Therefore some clickthrough networks are purchasing banners at the equivalent of 7 X $0.12CPC = $0.84CPM.With CPC it is important for publishers to be selective or become involved in the development of the creative, the message and the offer of the web site being advertised. This will ensure that the banners on the media site will sustain a high click through rate and therefore generate higher revenues.However many CPC banners are purchased from unsold inventory drawing on the model that something is better than nothing. This model works pretty well since up to 80% of banner advertising goes unsold.The bottom line, is that networks, publishers and advertisers will do the math and compare CPC with CPM in order to purchase or sell advertising at the most profitable prices. Most web advertisers don’t prefer CPC pricing according to a survey by WebCMO in September 1998. The estimated preference for CPC -0.13 vs. 0 for CPM.
4.3 Cost Per Transaction (CPT)CPT models allow the purchase/sale of banner advertisements based on the target market completing a specific objective after they click on the banner and are brought to the advertisers website. Models include Cost Per Action (CPA), Cost Per Lead (CPL) and Cost Per Sale (CPS).With CPT it becomes more important for publishers to be selective on their advertisers and to integrate both advertising strategies to form a profitable and synergistic relationship. CPT banners are not purchased like CPM. Here the publisher does not market their available advertising space. Instead the advertiser must actively market their CPT offer to publishers and convince them that it is in their benefit to form a CPT advertising relationship.CPT models require the advertiser to integrate software into their website that identifies which customer was referred to the website by which publisher. The customer is followed through the website until they make a transaction. The transaction is logged and a payment is credited to the publishers account.
4.3.1 Cost Per Action (CPA)CPA allows the advertiser to pay only when the target market performs a specific action on the advertisers website after clicking on a banner on a media site. Examples of applications of this model are site registration or the download of trial version software.The price of an action is dependant on the industry, product and agreement between the advertiser and publisher.
4.3.2 Cost Per Lead (CPL)The CPL model allows the purchase/sale of banners based on the cost of each lead generated from the individuals who click on the banner and are brought to the website to request more information. CPL allows advertisers to pay only for the identification of a potential customer who fills in a form to request more information about the product or service.The price of a lead is dependant on the industry, product and agreement between the advertiser and publisher.
4.3.3 Cost Per Sale (CPS)The CPS model allows the purchase/sale of banners based on the cost of the amount of sales generated through the website from the individuals who click on the banners.CPS allows the advertiser to pay only for sales directly as a result of a banner advertising campaign. The industry average CPS is 5 to 30 percent depending on the industry, product and agreement between the advertiser and publisher.