Cost Models in Advertising
Cost models describe how you settle costs with your traffic source platform.
Cost models in advertising
In paid digital marketing, an advertiser has to reward publishers for the traffic they send. Cost settlement is done by the platform that aggregates users (SSP, ad network, ad exchange) or by separate direct deals. Both sides have to agree on how the payment is made. Here come the cost models.
What are cost models?
There are the following cost models:
- CPM. Cost per mille (thousand). An advertiser has to pay for every thousand impressions (ad views). This cost model is most often used in native advertising.
- CPV. Cost per view. Same as above but you pay for each impression. CPV * 1000 equals CPM.
- CPA. Cost per action. An advertiser pays whenever a visitor performs a certain action (installs an app, purchases a product). CPA model has subtypes such as CPI (cost per install), CPS (cost per sale) or CPL (cost per lead).
- CPC. Cost per click. An advertiser pays for each click on an ad.
- Revshare. This cost model is similar to CPA, where an advertiser pays whenever a conversion occurs, but the price is not fixed. Instead, the price is a percentage of the payout. In order for this to work, you have to pass conversions to your traffic source.
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How are costs settled?
Because the price of traffic is not fixed – as many traffic sources have adopted various programmatic buying models, and the volume of traffic may change rapidly – an advertiser usually has to pay money upfront.
It works like a prepaid phone. An advertiser uses a certain amount of money to top up their account and this money is then used by their traffic source to pay for traffic. To control their ad spend, users can put certain limits in the form of daily budgets or campaign budgets.
Other ways of settling costs
Larger players in the industry often negotiate proxies for premium traffic individually. They have access to it, as RTB auctions follow a waterfall schematic: direct advertisers that have negotiated deals get a chance to purchase traffic before an RTB auction takes place.
Advantages of CPM
The CPM cost model comes with several advantages. Firstly, it enables predictable pricing as it enables you to purchase a lot of ad views for a fixed price. Secondly, the overall price for ad visibility is low. With high CTR, CPM is a low-cost solution.
CPM allows for easy scaling. When you get clicks and conversions, your earnings go up while your costs stay the same. CPA can sometimes kill profitability, as with increased earnings come increased costs. Not with CPM. Paying for a bundle of ad views allows for easy budget planning and predictability.
eCPM vs CPM
eCPM stands for ‘effective cost per mille’. It basically tells you how much you have paid for 1,000 ad views:
- If you were already using the CPM model, eCPM tells you the final cost (RTB auctions often use second price models, where you pay less than your bid).
- If you were using other cost models, eCPM tells you the price of 1,000 impressions.