Compensation models

This chapter will cover basic models that are used on the internet to price the advertising as they are described by Chaffey (Chaffey, 2003:337) and supplemented from Wikipedia (Wikipedia Compensation Methods, 2007).

Compensation models are categorized into three groups:

■ Result Based Models o Per Response o Per Action

Per Time Period

Paying for the advertisement on a time basis can be compared to hiring. Commonly, the price is based on a cost per mile (CPM) basis. Advertiser can choose whether the ad will run on the whole site or its section, or will be displayed whenever a visitor searches for a specific keyword. (Chaffey, 2003:337; Zeff, 1999:159) According to Hoffman and Novak, this method is not used any more (Hoffman & Novak, 2000).

Per Exposure / Per View/ Per Impression

In this model, advertiser and content provider agree on a payment on a cost per mile (CPM) basis (Chaffey, 2003:337). This method is also known under the name pay per impression (PPI) (Wikipedia Compensation Methods, 2007).

Result-based models

Although content providers can prefer selling advertisements on a CPM basis, arguing that because they do not have control over the creative, they act solely as suppliers of viewers, there has been a significant rise of compensation models based on results (Chaffey, 2003:337). According to Chaffey, these comprise of:

Per Response

Response on an online advertisement is measured in clicks, thus the response is click. This model is also known as Pay per click (PPC) The cost is calculated according to the number of click-throughs - in this model, costs are measured in cost per click (CPC). (Wikipedia Compensation methods, 2007)

The most known example of pay per click compensation model is Google AdWords. In Google AdWords, advertiser only pays when the user actually clicks on the ad and lands on advertiser's website. On the side of content providers, CPC pricing is used in Google's twin service, AdSense. (Google AdWords Learning Center, 2007) As reported by Strauss et al., according to the keyword popularity, advertisers can spend between 10 to 500 thousand USD per month. (Strauss et al., 2006:328) Cho et al. state that the advertisers pay in between 0.01 to 100 USD per click to Google in AdWords program (Cho et al., 2005).

To counteract unsuccessful ads, Google automatically chooses the best ad to display between many advertisers based on their willingness to pay higher price, their media click-through rate and allowed daily or monthly budget. The higher is the amount advertiser is willing to pay, the better is the ad placement and thus the probability being clicked on. In other words, Google is selling advertising in continuous auctions, separately for each keyword. (Cho et al., 2005; TradeDoubler Keyword Marketing, 2007)

Per Action

Duffy notes that although payment for clicks was a step forward from the merchant's point of view, they still do not deliver satisfying results. Often, clicks were not related to actual sales. Duffy further argues that the only win situation for merchant is actually the sale. (Duffy, 2005)

According to Chaffey, per action based pricing means that the payment is calculated from number of specific actions that were triggered by users that clicked a particular ad. The action can consist of downloading a product sheet, software trial, sales lead or even purchase. (Chaffey, 2003:337)

Wikipedia lists several methods, where per action compensation model is used:

■ Pay per sale (PPS) - also called Revenue share - is a method when advertiser pays a percentage of a sale made by a customer coming from content provider's website. Respective pricing is called Cost per sale (CPS).

■ Pay per action (PPA) and commonly used synonym Pay per lead (PPL) - are terms used for general per action pricing, where action can be anything from filling out a form to sign up. Respective costs are measured in Cost per action (CPA) or Cost per lead (CPL). On the contrary to pay per sale, the cost is fixed in this model (as sale cannot be measured). Common special forms of pay per action are pay per call and pay per install, where content provider is paid for customer's call to advertiser or download and installation of computer software.

(Wikipedia Compensation methods, 2007)

Result-based models, both per response and per action, are tricky for content providers when signing long term contracts. They make it is easier for them to sell advertisement space, but on the other hand, content providers lacks control of actual media that is used and product that is advertised. If a CTR (click-through-rate) is low, content provider is paid less for the same than with other compensation methods. (Zeff, 1999:157-159)

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