How online ad rates are quantified?

A question was sent to me yesterday asking how rates are quantified in online advertising, including variables which may affect it. I believe this type questions are better addressed by internet marketers.

However, I’d like to share my take on this (and please to add your comments as well or correct me).

There’s no exact science here, IHMO, however a lot of the people in the industry will tell you otherwise. So, let’s start with the existing and more popular models;

The Impression Model. This is the most common and widely used model in internet advertising as it is easily computed and monitored as well as good for branding and awareness. Measured by CPM, or cost per thousand impressions, you only need to provide the rate and the volume. So, if you have 1 million page impressions a month and you peg your CPM at $1.00, you’ll end up with $1,000 a month in revenue (i.e. 1,000,000 / 1,000 x $1). The next obvious question is how to determine your CPM rate. Well, it depends on the quality and type of traffic that you get. CPMs for sites like Friendster or MySpace will be way lower compared to sites like NBA or CNN because of the type of people targeted on these sites.

The Click Through Model. This model works under the premise that if the ad is interesting or relevant, then people will “click” on it. This approach is usually done if the advertiser wants to attract visitors into its own site. The rate for this model is measured by click-throughs or the commonly called CTR. The higher the CTR, the better the results for the advertiser and revenue for the site owner. The next obvious question is how to determine your cost-per-click. Well, again it depends on how targeted your site is (read: niche) as this affects your ad relevance and eventually CTR. Google Adsense is the best example in terms of current industry pricing. The rule of thumb is, the more expensive the product/service being advertised, the higher the CPC.

The Cost Per Action Model. One of hardest model to implement is Cost Per Action or CPA as the advertiser only pays if a certain action/event is fulfilled. It could be a new site subscriber, newsletter subscription, a trial/download or a sale. The CPA rate is high and will depend on an industry. Call it a commission of sorts, so if the product being sold thru CPA is a laptop, expect the rates to be really high compared to the one who only fulfilled an e-book subscription.

That doesn’t completely answer the question right? In the end, it’s all about perception then performance. Most internet advertisers will scout around and compare rates, maybe try each one of these models and track which ones convert the best then stick to it. If you’re a publisher and you want your advertisers to keep running their ad campaigns, give them something that is worth every penny they spend and more. Unless you’re a giant like Inquirer.net or GMANews.tv (I was going to say, Inq7.net) where advertisers are fighting tooth and nail to get a spot on the front page, a potential ad buyer will always have hundreds and thousands of other places to spend their ad money’s worth.