Display Advertising: Why a Variable CPM is Better than a Fixed CPC or CPA

For many years cost per thousand (CPM) pricing has been the main buying model for premium display advertising space. CPM allows publishers to generate revenue based on volume, and allows advertisers to pay for impressions at a fixed price per thousand.

The CPM buying model works perfectly for premium inventory where the value proposition is more about branding than direct response, like buying a full page ad in a glossy magazine. On the other hand, cost per click (CPC) and cost per acquisition (CPA) models have been utilised as an alternative to CPM by publishers looking for maximum fill rates to ensure an ad is served for every impression available.

Interestingly, CPC and CPA are often perceived to be more appropriate for performance-focused advertisers, as these methods allow cost management based on a predefined volume of users visiting a site or completing an action.

However, from a publisher’s point of view, only generating revenue when a user clicks or goes on to complete an action is a risk. It also assumes there is zero value in showing someone an ad they do not directly interact with.

Consequently, there are limitations in the types of advertising inventory that can be purchased if buying on a CPC or CPA basis. While there are specialist suppliers who may have relationships with premium publishers allowing them to buy on a CPM basis and sell CPC or CPA, in reality, quality publishers know the value of their inventory. This means buying on a CPC or CPA model will limit reach across these premium sites.

Enter the variable cost per thousand (vCPM)

The advent of Real Time Bidding (RTB) –  using technology to buy advertising space the millisecond it becomes available – has revolutionised the way display media is bought and sold. Now, rather than paying a fixed CPM, advertisers can identify the most valuable impressions and bid accordingly, using a dynamic pricing structure based on their own performance goals.

Premium publisher inventory can be purchased alongside intrinsically lower value impressions with the system deciding what price to pay within pre-defined limits:  essentially the better the inventory, the higher your bid.

What makes one impression better than another?

The answer to this question is simple – how well it performs. Measuring this means ensuring there are clear performance goals. These goals can still be based on an effective CPC or CPA worked back from the CPM, or could be about brand awareness and measured accordingly. Put simply, the best impressions will be the ones that most frequently deliver the required results.

Working out which impressions fall into this category involves periods of testing, learning and optimising. The testing phase for a campaign will depend on how quickly the system (and the resource managing it) can identify impressions that deliver the right result. Once these have been found, campaign management is a process of managing budgets and refining targeting.

Data is fundamental to the process

In solving the inefficiencies of buying online media, RTB platforms have inadvertently caused another problem. There is now a massive amount of adverting space available to buy. Every day hundreds of millions of impressions are traded across all manner of sites and the issue lies in finding the proverbial needle in a haystack – the right user with the right ad at the right time.

Data is fundamental to identifying the right impressions to bid on and ultimately in driving results.

Many advertisers currently use a relatively simple, single source of data to inform a bidding strategy. For example, first-party retargeting data can be used to evaluate relevance based on whether or not the ad impression will reach a person who has previously visited a product page. Similarly, third-party data can be used to decide if an ad will reach audiences who match a pre-defined profile, based on their age, gender or location.

A single piece of data can be useful but it can also lead to assumptions and inefficiencies – I am sure we have all been followed (stalked is perhaps more fitting) around the internet by a product we only casually viewed and have no intention of buying.

While this approach will undoubtedly deliver results, it’s akin to fishing with an Uzi: you have to fire off a lot of shots before you hit your target, and you’ll probably annoy quite a few people in the process.

Consider multiple types of data

A more accurate approach is to consider numerous pieces of data and use them to inform a bidding strategy. For example, combining retargeting with keyword data from organic and paid search and then using these to change the messaging in a display ad to maximize its relevance.

At the highest level of sophistication, a campaign goes beyond simple “yes/no” decisions. It develops a scale by which the impressions with the most value to the advertiser receive very high bids, while the impressions with the least value receive the lowest bids.

These dynamic, data-led approaches to bidding are changing the way media is bought and sold. Previously, a brand looking to target users interested in buying a car might have purchased a block of advertising space on an automotive site, knowing the user base will largely consist of their target audience. Now, they can extend their reach to multiple sites using audience data to identify valuable users, bidding accordingly on each impression.

Data about users can be gathered over a period of time and used to deliver not only an ad about a new car but an ad about the right new car for that user.

Ultimately,audience targeting presents an opportunity to increase the reach of a campaign beyond contextually related sites and content, while still ensuring the users exposed to the campaign are relevant.

De-duplicate reach and manage frequency

One of the other major advantages of extending delivery beyond top tier sites is the potential to reach users who would otherwise not have been targeted. This in turn limits the frequency with which users see the same ads.

Large sites tend to have audience numbers that scale very quickly. A large percentage of their audience will visit the site within the first few days of a month. After this point, it is mostly the same people returning multiple times.

Audience numbers for smaller sites scale more slowly throughout the month so there is less wastage as users see fewer ads over a longer period of time.

To optimally manage reach and frequency, advertisers should look to consolidate as much of their buying as possible to a single buying system. By executing a buy from a single system, a campaign’s reach can be expanded to audiences who are yet to be exposed, limiting wasted impressions to users who do not respond positively.

Long term gain is better than short term saving

Using a variable CPM removes the sometimes hidden limitations in the types of inventory that can be purchased and the prices paid. Campaigns will run across a more diverse and arguably higher quality of publisher, meaning more chances to target prospects in an environment where they will respond favourably.

CPC and CPA models may be considered less risky and potentially require less commitment, but advertisers looking to maximise the returns from their investments need to focus on long term value rather than short term savings.

If you would like to find out more about how Fresh Egg can create effective display campaigns for your business, please get in touch using our contact form or by calling 0845 373 1071.