After all is said and done, the buyers still have to pay the publishers for having the privilege of serving ads on their sites. This brings up the point of payment models, frequency of payment, and time alloted for payment after each sale.
Within the world of ad tech, there are many pricing models in which a transaction can be completed. Buyers and sellers use these models depending on which ones are most effective for their strategies. There are distinct advantages and disadvantages of each pricing model.
Flat Fee
Flat fees are one time fees that are paid to the publisher by the buyer as according to a contract such as an IO. As long as the performance fits within the contract terms, the buyer is responsible only for the flat fee (no hidden fees)
CPM
Cost Per Mille. This is the price that the advertiser has to pay the seller for every 1,000 impressions served on behalf of the advertiser. This is by far the most commonly used pricing model in ad tech today.
Note: CPM is calculated on a per 1,000 basis, but the other models are calculated on a 1:1 basis.
CPM = Revenue/Impressions *1,000
CPC
Cost Per Click. Advertisers use this metric to determine whether or not their ads are performing well. A lower CPC means that fewer marketing dollars were spent to generate a click. The lower the CPC, the the happier the advertiser will be. However, it is important to be wary of bots and other bad actors that may create fraudulent clicks. A promising CPC could actually be the result of a click farm.
CPC = Revenue/# of Clicks
CPL
Cost Per Lead. This is the cost of generating a “lead” for the advertiser. What the lead entails is determined by the advertiser, but it generally means an opportunity creation, such as an email subscription.
CPL = Revenue/ # of Leads
CPA
Cost Per Action. This is what brands ultimately want their buyers to do. It can mean purchasing a certain product or subscribing to a certain service. Because CPA is based off of actual results, it is generally the most expensive of the pricing models.
CPA = Revenue/ # of Actions
Transfer of Risk
As we move along the different pricing models, we not only see the prices get more and more expensive, but we also see a gradual transfer of risk to the publisher. Although the publisher is getting more revenue for each successful click, lead, or action, the publisher could be left delivering lots of impressions for free if it is unable to generate the given metric.
CPM > CPC > CPL > CPA
Least Expensive > Most Expensive
Least Risk for Pub > Most Risk for Pub
The Painfully Slow Ad Tech Payment Times
Ever since the economic crash of 2008, there is an unwritten rule in the ad tech industry that the payment times have been slowed. These days, it is standard to see net-120 payment terms.
This slow payment is becoming more and more of an issue. In essence, the buyer receives a distinct advantage because it is able to generate a float off the 120 days that it can use the “borrowed” money.
Sellers, on the other hand, suffer because they may not receive the capital they need to stay afloat in the given time. Sellers are paying an actual price in interest because of this.
This issue stems because there needs to be payments done in every step of the ad tech process. SSPs need to pay Publishers before they get paid themselves. Advertisers need to ensure that the buys met their targeting needs through ad verification partners before they make a payment to the DSP.
Blockchain has been a point of discussion for payments at the point of service but it is far from being complete. For now, ad tech companies will have to deal with the slow payment speeds.
Sources
- https://adexchanger.com/exchange-ideas/programmatics-slow-payment-problem-puts-strain-industry/
- http://www.ronkato.com/cpm-cpc-cpa-and-the-transfer-of-risk/
Price is what you pay. Value is what you get.
— Warren Buffett
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