Different Ways Online Advertising Rates Are Calculated

Advertising, is perhaps the second oldest profession in the world. And online advertising is probably the biggest thing on the web. Subscription or member based services are harder to implement, and its easy for one to sign up nowadays for the plethora of online advertising providers available.

The basic idea behind advertising, whether online or offline. People are generally willing to pay to expose their brand/product/service to an audience, and also, the opportunity to convert members of those audience into paying customers or members of their community.

These are some of the few ways online advertising is calculated. Here are some of the established industry norms:

CPM - Cost per Mille
CPM is usually referred to as "cost per thousand impressions", and the M in the CPM refers to mille - the Latin term for thousand. This means that the website owner will be paid based on the number of times the ad is shown to the visitors of the said website.

As the advertiser is paying for people to see the ad, this generally works best for websites with lots of traffic, and is usually placing dependent - the ad is usually placed in a prominent section of the blog.

CPC - Cost Per Click
CPC refers to cost per click. The website owner makes money based on the amount of legitimate visitors that click their online ads. This can apply to both text and image ads, although text ads are more popular.

CPC ads can generally be placed anywhere, due to the fact that the results are measured based on clicks and the concern is not so much branding, as much as performance. However, click based ad networks are vulnerable to click fraud. Click fraud is often defined most simply as "a person clicking on his/her own ads". When a user is found to be engaging in click fraud, the usual action of the ad network would be to terminate the said users account. However, there is seldom legal action, due to lack of laws regarding the issue. Some countries are adopting legislation to make click fraud a criminal offense.

CPT - Cost Per Term
The upside of cost per term is that both sides are aware of what they will get, however, the downside is exactly the same reason - the fixed price. This does not allocate for increases or decreases in traffic, nor for non-performance (ads not being clicked).

It is usually either high traffic sites or low traffic sites that will get offered CPT ad placements. Of course, higher traffic sites will get a much larger fixed sum.

The reason why CPT is used for high traffic sites is usually that it would cost to much to advertise via CPM, and for lower traffic sites, they are usually bought together as a package together with other low traffic sites. For example, if you wish to buy 1 million impressions (ad views) on a site that generates 250,000 impressions a day, the advertising you buy would only last for four days. Assuming you are paying a CPM rate of $10 (which means $10 for 1000 impressions, or a cent per impression), you will end up paying $1000 for 1 million ad impressions. A negotiation between the advertiser and the website owner could then go as thus: We will give you $1500 for 2 million impressions. (In essence, 500,000 ad impressions are given for free in consideration for a large buy).

Although getting a lower rate, the website owner gets to close a confirmed sale of more of his/her ad inventory, and the advertiser gets value for money.

As an example of how CPT works on a lower traffic scale is such: for example, a site with 50 unique visitors a day and a site with 82 unique visitors a day might get the same CPT price of $10 for a month's worth of advertising.

CPA - Cost Per Action
Some ad networks, while still calculating the number of clicks and impressions serve, only calculate a profit for the website owner when the visitor sees an ad, clicks on it, and then performs an action.

The action can be as simple as the visitor signing up with the website advertised, or as complex as a visitor having to purchase a given product. CPA rates are usually higher than CPC, as much more is expected from the audience of the advertising.

As of such, CPA can work well for niche sites (eg, a site on gardening, advertising a gardening supplies online store).

v1.0 - Initial version. Copyright Josh Lim of Advertlets.com, based on what Josh know's so far. Cred: He signed up for his first online advertising service in 1996!