Types of ads you can run and payment models

Different payment models

All the talk about online advertising makes it sound like there's only one type of ad, which isn't the case. There are lots of various kinds of ads you can run and several different payment models to choose from for those ads. Let's consider the payment models first. With online advertising, you can pay for impressions, just like traditional media, but you can also pay for performance. This kind of arrangement lets you pay by the click that is, you pay only if an interested customer clicks your ad. All those people who aren't interested and don't click…you don't need to pay for them. It's not necessarily a bad deal.

CPM Cost-per-Thousand

Let's begin with the payment model you're probably most acquainted with, the good old cost-per-thousand impressions (CPM) model. It's a no brainer; you pay a particular price to get your ad in front of the thousand eyeballs.

For example, you might make an ad placement with a USD 50 CPM. That is, you pay USD 50 for each 1,000 impressions. This may be measured in terms of 1,000 copies printed of the newspaper or magazine or 1,000 viewers of the television program. In any case, are applying this USD 50 CPM rate towards the total number of impressions the total print run or the full viewership. So, continuing the example, if you place your ad in a magazine with a 100,000-copy print run, you pay USD 5,000 total for your ad that's 100,000 divided by 1,000, times the USD 50 rate.

With this particular traditional model, you're spending money on exposure, not for results. It doesn't matter if you don't make a single sale from the ad; you still pay the full cost of the ad. The only thing the host medium guarantees may be the eyeballs; what are the bodies attached to those eyeballs do after viewing your ad is completely up in the air.

While this payment model isn't the dominant model on the Web, it's still used for some online advertising. You're probably to find CPM pricing with online display ads. In this instance, an ad network guarantees placement on the selection of websites that deliver a specified amount of traffic; you employ the CPM rate towards the website traffic, and also you get how much you pay.

Know, however, that with the online CPM model, there is no guarantee of any sort of getting visitors or traffic back to your website. You're paying solely for placement, not for results.

CPC Cost-per-Click

Rather than pay for impressions or views, most online advertisers opt for a more performance-oriented payment method. The most popular online payment method, then, is cost-per-click (CPC), a hallmark of pay-per-click (PPC) advertising. With CPC/PPC ads, the advertiser pays only if a user clicks an advertisement. The advertiser doesn't pay for the placement of the ad itself, therefore the number of impressions or views is mainly irrelevant.

The actual cost-per-click is typically based on how much the advertiser would like to invest in a specific keyword. That is, you select a keyword to keep company with your ad, and your ad is displayed on websites that have similar content or on search results pages when someone searches for that keyword on Google, Yahoo!, or another search engine. How often your ad is displayed or how high up on the search results page are factors of how high you bid for that keyword in relation to how high competing advertisers also bid.

If you bid more than your competitors, your ad will be seen more often and more visibly. If you're cheap about this (that is, if you get significantly outbid), your ad is going to be less visible. As to that CPC bidding, how much you really end up paying is really a factor of that which you bid versus what your competitors for that keyword bid. You don't necessarily pay the full bid price; if you outbid the competition, you'll only be charged slightly more than the next-highest bid. So if you bid USD 2 per click and the next-highest bid is USD 1 per click, you may only be charged USD 1.10 per click or so. In any case, you'll never be charged more than your specified bid amount.

And remember, you only pay when someone clicks your ad. Even if your ad gets displayed on a website that has 100,000 visitors per day, if only one of those visitors clicks your ad, you pay simply for that single click.

Given that you never know in advance the number of clicks an advertisement might receive, how do you know how much you'll spend for CPC advertising? That's simple; you begin a budget up front. The ad network will run your ad until you've hit your budget level and then cease all further display. You're never charged more than what you budgeted. Most online ad networks work with a daily CPC budget level. So, for example, if you set a USD 100 daily budget and bid USD 2 per click, your ad will run each day until you've received 50 clicks.

The benefit of CPC payment is that you're truly spending money on results. You don't pay if no one takes action on your ad. It's that simple and that powerful. For this reason, CPC may be the dominant payment method for online advertising. Certainly, all of the text ads you see on the search sites are CPC in nature; much banner advertising is also moving towards the CPC model.