One of the most daunting tasks faced by e-business entrepreneurs or website owners is improving their online advertising ROI. This invariably invites a thorough review of online advertising models so as to ascertain which is better and gives maximum return on your advertising budget.
So, before you step in and start your online advertising campaign, you have to check out which online advertising model is most effective in terms of your investment and also regarding your returns. In short, you have to find out most appropriate pricing models that are most effective for advertising over the Internet.
In this context, here we review 2 of the most popular categories of online advertising models that cover over 90% of the advertising that is currently used over the Internet. These are CPC (Cost per Click) or PPC (Pay Per Click) and CPM (Cost per Thousand Impression) Pricing Models.
So, once we review these digital advertising pricing models, you can then ascertain which one makes the most sense for your business. Here, it becomes important to note that you should carefully select digital advertising models or pricing models as they tend to have a profound influence on your overall advertising budgeting strategy.
So, if you have any such questions about online advertising such as, “Should I use CPC or CPM pricing model”, you should definitely stick with this post as it helps to answer your questions and determines which one is most suitable for your business.
Now, let’s dive into the different advertising pricing models and see how exactly they work out.
What are CPC and CPM Ads?
What is Cost per Click (CPC)
Cost per Click (CPC) is an online advertising pricing model where advertisers have to pay only when their Ad is clicked upon, not each time when an Ad is shown. In this type of pricing model, advertisers are safe and have to pay each time when their Ad is clicked, but they have to make sure that their ad attracts the viewer, and they click on your ad.
This makes them sure that their ad campaigns are relevant so that a click stands a good chance of being converting into an action.
This pricing model also requires that publishers bear the responsibility of displaying the Ads in right places on their websites so that Ads receive clicks. So, CPC simply translates into “no clicks, no revenue” pricing model. Thus, it is a very simple formula for both sides. Perhaps the elements of sharing risk and the overall simplicity in measuring performance are the main focal points which have made CPC pricing model so successful with advertisers and publishers. For example, CPC pricing model has been widely successful on search engines like Google and Bing.
Today, Google generates billions of dollars in revenue by acting as a middleman between advertisers and publishers. Google shows Ads on search engine results page and also on another website wherein it acts as a publisher.
Actually, the success of CPC model has been instrumental in shaping up an entire industry where big shot companies pay search engine marketers for handling their advertising campaigns. So much so, that there has been a marked shift in advertising expenditure towards the online world.
However, in spite of the big benefits of CPC pricing model, there is one noticeable problem in adopting this online advertising model. Actually, Cost per Click Ads is subject to click frauds. Herein, there is a possibility that network of people gets involved in clicking on Ads with whatsoever no interest in products or services that are being sold or advertised.
This can be to drive up advertising costs, or it can be an attempt to generate revenue by clicking on Ads that show up on publisher’s website who is also involved in fraud. Having said this, Google has played a vigilant role in combating such frauds. The best testimonies are the millions of dollars that are being regularly pumped into CPC pricing model.
What is Cost per thousand Impression (CPM)
Cost per thousand Impression (CPM) is the oldest online advertising pricing model. It is an advertising model which is used on websites wherein advertisers have to pay when their Ad is shown for a certain number of times regardless whether it is clicked on or it is not clicked. At the initial stages, CPM was actively promoted by big portals such as AOL and Yahoo.
It turned out to be a great revenue generator for them being largely risk-free. In this pricing model, the advertisers did all the creative work of designing their Ad campaigns and made the payments. The portals only had to display the Ads as often as they could until the budget got exhausted.
So, this online advertising model was one-sided and didn’t offer any sort of guarantee of performance. Usually, Publishers prefer to bill on impressions as CPM is not a performance based advertising model. Simply put, publishers bear no risk on ad performance with a CPM advertising system and get paid on every impression.
CPM can be better for the advertiser if they want to be spread brand awareness. With attractive big banners, they can spread their brand name easily at a low price. Second if the advertiser is able to generate high CTR on their banners it can reduce cost per click. Say CPC model is charging $0.5 per click and CPM is charging $5 per CPM and on CPM ads, advertiser is getting 20 clicks on per 1000 ad display. His cost per click will be $5/20= $0.25 so he is paying 50% less than CPC model.
Now the ultimate question:
CPC vs CPM – Which is better?
Going by the above description, CPC comes out to be the clear winner. A click is always much more worthy than an impression. However, you also have to consider other factors such as costs and goals.
As a matter of fact, a cost is the primary difference between CPC and CPM. Impressions cost far less than running CPC Ad campaigns. For example, you might buy an ad at $1 CPC. Whereas, you might buy an ad for $15 CPM. Thus in order to equal the effectiveness of CPC ad, you just need 15 clicks out of 1000 Impressions. This means that you require 1.5% of the people (who see your ad) to click on your ad, so as to make your ad equally as effective and equally as expensive as a CPC ads.
So, it ultimately turns out that CPM ads are more fickle. Going with CPC ad campaign, you pay for a guarantee of a certain number of clicks.
Why should you go for CPC Ad Campaign?
Primarily you should go for CPC Ad Campaign as you are only charged when people click on your ads. This translates into the fact that you can get thousands of “free impressions”. As an advertiser, you always want to pay for ads that generate results for you and in that sense, CPC allows you the freedom to pay only when your ad receives a click. And moreover, when you have a low budget, and you don’t have enough time for optimization, CPC can be the best option for you.
Why should you go for CPM Ad Campaign?
CPM Advertising Model is often used by people running tens, hundreds, or even thousands of ad combinations. Actually, CPM campaigns provide you the opportunity to maximize your performance beyond a stated bid rate and figure out the lowest possible bid. Moreover, CPM bid has no connection whatsoever how well your ads actually perform.
For example, if CPM bid is $1.00 per 1000 impressions and your CTR (click through rate) is exceptionally high, you can be successful in obtaining a CPM of as low as $0.10 despite the fact that you bid at the rate of $1.00.
Having said this, with CPM Ad Campaigns you should closely monitor your ads because:
There is every possibility of exhausting your budget on low performing Ads. Plus, your ad performance can decrease over time, pushing your effective CPM up over time.
The Ultimate Decision – CPC or CPM
This decision ultimately depends upon your Ads and what follows next. In case your sales funnel is effective, but your ads are not that good, then CPC is the best choice for you. However, if your Ads are good, but your sales funnel is not as effective, then CPM will prove to be a better choice for you.
And moreover, going by the above description it can be easily deduced that CPC online advertising pricing model stands out as a better choice for businesses looking to advertise online through various powerful platforms such as Google, Facebook, LinkedIn, etc.