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Advertising is so widely used because it satisfies all of these needs. The publisher gets the revenue needed to cover development and maintenance costs. The user gets value (they get to view content or use applications) for a reasonable price (they simply need to view the advertisements). The advertiser is able to communicate their message to the intended audience. Assuming each party acts responsibly and holds up their side of the implied contract, the system works, and is sustainable.
The system does need all three to be successful, though. If any one falls through, the system falls apart. If advertisers don’t purchase advertisements, the publisher can’t sustain development. If publishers don’t make meaningful content available, users have no reason to visit, and there is no traffic, and thus nothing for advertisers to buy. If users refuse to view advertisements, the advertisers get no value in exchange for their purchases, and will thus not continue buying.
All of these issues apply equally to offline advertisers as well as online. In fact, in many ways, the world wide web is just a new media channel, providing many of the same services as television, radio, and printed media. Assuming the market is there on all sides (publisher, user, advertiser), the system can be just as successful as it is in traditional media.
There are, of course, many other methods that publishers can monetize their content and services, such as via paid subscriptions, retail, and so on. However, these methods are outside the scope of this paper, and thus won’t be discussed in depth.
Online Advertising Models
There are primarily three different models used in online advertising: CPM (Cost Per Mille), CPC (Cost Per Click), and CPA (Cost Per Action). They differ primarily in how the advertising itself is bought and sold, although there are also more subtle differences between the three in who is responsible for different aspects of the process.
The simplest model to understand, and the one that directly inherits from most offline advertising, is CPM. CPM is an acronym for “Cost Per Mille”, meaning cost per 1,000 ad views (impressions). The advertiser and the publisher negotiate a fixed amount that the advertiser will pay for every 1,000 times an ad is shown. CPM is a very simple payment scheme, assuming the two parties can agree on a method for counting impressions. There are often stipulations in the agreement, such that the ad can only be shown on certain pages of the publisher’s site, or can only be shown on pages with a limited number of other ads.
CPM advertising is often utilized for so-called “brand” advertising. Brand advertising is designed to build general awareness of an advertiser’s message, and is not intended to immediately lead to customer action.
In a CPM relationship, the publisher is primarily concerned with maintaining a high-quality audience that has well defined interests or characteristics. The advertiser is primarily concerned with creating a message that will be noticed by their target audience, because they pay for the impression whether or not the user actually sees the ad. In general, the more knowledge a publisher has about a particular audience, the higher the CPM that can be charged, because the advertiser is able to more clearly know who their message is being delivered to.
Since CPM is chiefly concerned with buying and selling certain audiences, the onus is on the advertiser to ensure that the advertisement is being delivered to the target audience.
One prominent weakness of CPM advertising lies in the fact that the advertiser is only getting value if the user actually sees the ad. If the user doesn’t notice the ad on the page, the money the advertiser paid is wasted. In some cases, this can result in people going to great lengths to ensure the ad is seen, such as making obnoxious banner ads, or in extreme cases, resorting to “pop-up” or “pop-under” ads. This lowers the value proposition for the user, because the browsing experience becomes less pleasant, and it may lead to the user abandoning the publisher. Another weakness is that it is difficult for an advertiser to prove that they are getting the desired value from the advertising. Since the goals of many CPM campaigns are not clearly defined, it can be difficult to measure results against them.
Another model, which has become quite popular in recent years, is CPC advertising, or Cost Per Click. In this model, the advertiser pays the publisher a set amount for each user that clicks on the ad, regardless of how many times the ad was shown. This relaxes many of the stipulations associated with CPM advertising, because the advertiser is no longer concerned with who views their advertisement, only with the resulting quality of the set of users that demonstrate interest in the message.
Because the advertiser typically has little or no visibility into who is viewing their message, CPC advertising is typically less appealing to brand advertisers than CPM. Instead, the primary market is made up of “performance” advertisers, who are mostly interested in provable metrics of how the traffic they are buying performs, for instance, how likely it is that a user that clicked on an ad will purchase something from the advertiser. These advertisers are less concerned with overall user-awareness of their message, and are usually interested in immediate action from the user (such as buying something, or signing up for a newsletter).
In a CPC relationship, it is now the publisher’s responsibility to ensure that the right advertisement is shown to the right audience. The advertiser is still responsible for crafting a message that will appeal to the target audience, and hopefully only that target audience (the advertiser doesn’t want to pay for clicks from users not likely to be interested in their products), but the exact composition of the total audience is no longer important to them.
In some respects, CPC has advantages over CPM. It is easy to compare the actual performance of an advertising campaign against the goal. Also, the advertiser is no longer concerned with simply getting as many eyeballs as possible viewing the ad, so the incentive to create obnoxious ads is virtually eliminated.
However, CPC advertising has weaknesses of its own. Primarily, “click fraud”. Since the publisher’s compensation is directly tied to the number of clicks generated, unorthodox publishers often resort to questionable tactics to increase the click count. These activities vary from outright cheating by generating false clicks or incenting users to click on ads that they’re not actually interested in, to more subtle attempts to “trick” users into clicking on ads, by disguising them as page content. Such fraud lowers the value proposition for the advertiser, who may decide to leave the market.
Click fraud is a serious problem that is currently being faced by the CPC advertising market. It is commonly accepted wisdom that in most cases, 10-15% of generated clicks are invalid for one reason or another[i], and in some cases that number can be as high as 50%.[ii] It has been estimated that advertisers are being billed $1 billion annually for fraudulent clicks.[iii]
A third model, which won’t be covered in great detail in this paper, is CPA, or Cost Per Action. In this model, the advertiser pays a set amount for each user that performs some specified task, such as making a purchase or signing up for a credit card. The “action” is usually similar to the desired goal of a CPC campaign, but in this model, the publisher has all of the responsibility, from matching ads to users, all the way to designing the actual ads. This is the safest model for advertisers: since only proven users are paid for, there is no opportunity for wasted impressions or fraudulent clicks.
Interestingly, this payment model has led to the appearance of several “affiliate networks”, companies who offer users, for example, free MP3 players, in return for “responding to” a certain number of CPA advertisements. The programs are designed such that the publisher doesn’t reward the user until the total revenue from CPA payments exceeds the value of the gift itself. If the user quits after only signing up for a few “offers”, the publisher still gets to keep the CPA revenue, but no longer has the expense of providing the “free gift”.