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kineticsequence.com

The New Way
Of Pricing
Digital Advertising

PERCENT OF SPEND VS CPM

Executive Summary

In a rush? Here’s the quick version of why our pricing model is so great for advertisers.

Many companies that sell digital advertising, such as display ads and video pre-roll ads, sell them at a certain price for every 1000 ads that are shown (otherwise known as a CPM). An example scenario would be if an agency pitched to an auto dealer that they’ll run display ads targeting people currently interested in buying a new vehicle for $8 per every 1000 ads shown. This “$8 CPM” is a common price for agencies to sell display ads for.

Only $8 for 1000 ads…sounds pretty cheap right? Here’s the problem - we know that it costs closer to $1-2 CPM to buy basic display campaigns. So if the auto dealer gave the agency $10,000 to run a display campaign and the agency behind the scenes is buying it for $1 CPM, that means they spent $1,250 on ads and then kept $8,750 for their own profit. That’s terrible for advertisers, so we use a different pricing model that works for everyone.

We are transparent about how much we charge as a management fee rather than hiding our fees. This fee commonly starts at 30% of ad spend for smaller budgets and will scale down with larger budgets. We then show the advertisers exactly how much we pay for the ads. The advertisers get way more ads served and gets a full transparent look at where their ads were shown and how much they cost.

COMPARING TWO DISPLAY CAMPAIGNS

Year Budget Pricing Model Impressions Clicks Click Through Rate
Year 1 $10,000 $8 CPM 1,250,000 1,875 0.15%
Year 2 $10,000 30% of Ad Spend 7,368,421 28,736 0.39%
Year Year 1 Year 2
Budget $10,000 $10,000
Pricing Model $8 CPM 30% of Ad Spend
Impressions 1,250,000 7,368,421
Clicks 1,875 28,736
Click Through Rate 0.15% 0.39%

Notes: This campaign was run 2 years in a row with the same goals, strategy, and budget. In year 1 the campaign was run in a CPM model and year 2 it was run in a percent of ad spend model.

The Whitepaper - 15 minute read

The whitepaper below is a much more in-depth document that discusses in detail why the CPM model is bad for advertisers for reasons such as hidden mark-ups, quality of inventory, and more. You can also download the whitepaper below to read on the go.

Download Whitepaper

Table of
Contents

  • Overview
  • THE CPM ADVERTISING MODEL
  • WHY THE CPM MODEL IS BAD FOR ADVERTISERS
  • THE NEW MODEL: PERCENT OF AD SPEND
  • CASE STUDIES

Overview

The internet has been rapidly evolving since the world wide web was made public in 1991. Within three years the first banner ad was shown on HotWired.com (former online spin-off of Wired magazine). Using a similar strategy as the magazine industry, HotWired dedicated space on their web pages for advertising to generate revenue. AT&T was the first advertiser to purchase a banner ad spot by paying a reported $30,000 to have their ad on top of HotWired.com for three months.

Technology and the internet have evolved exponentially since 1994, and similarly online advertising has evolved with it. Whether it is banner ads, video ads, or any other form of advertising on the web, they all are priced different depending on many factors such as which websites the ads will appear on and the type of ad. The direct deal pricing model between HotWired and AT&T, though still sometimes used today, is a rare way of purchasing online advertising. The most common pricing model is by selling ads based on a CPM.

CPM (cost per thousand) advertising is by far the most widely understood pricing model and from a high level can be the easiest to understand. However, at Kinetic Sequence we strongly feel that the CPM pricing model does not provide advertisers with enough transparency of where their ads are being shown, how much the media companies are marking up the advertising, or even if the ads are being shown to human beings.

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The CPM Advertising Model

WHAT IS THE CPM AD MODEL?

CPM (cost per thousand) is a pricing model where advertisements are sold at a predetermined rate for every 1,000 ads shown. For example, media companies commonly sell display ads for an $8 CPM, so for every $8 an advertiser spends they will receive 1,000 display ads in return. CPM pricing became very popular as a result of programmatic advertising which allowed advertisers to run ads across millions of different websites. It makes it really simple for the advertiser to understand how many impressions they will receive each month.


Below are some of the common prices we’ve seen media companies charge in the past (though the prices will vary depending on company):

CPM PRICING EXAMPLES

ONLINE BANNER ADS $8 CPM
0:30 VIDEO PRE-ROLL $$25 CPM
OTT VIDEO ADS $40 CPM

WHERE THE CPM PRICING MODEL WORKS – DIRECT DEALS

CPMs are a great pricing method when you know exactly what websites you are purchasing advertising from. If you are buying directly from CBSsports.com, and you know all ads are going on CBSsports.com, a CPM is a great way to buy and sell ads. The advertiser can understand what they are buying and make an educated decision if they think the advertising is worth the CPM price.


Most advertisers however don’t do direct deals with websites or publishers. It is much easier to pay a CPM to advertise on millions of different websites. This is where the problems start with CPMs and begin to not benefit advertisers.

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Why The CPM Model Is
Bad For Advertisers

BEING CHARGED A CPM IS BAD FOR ADVERTISERS FOR TWO REASONS:

CPMs lack transparency which allows for prices to be marked up exponentially by media companies and marketing agencies

Media companies/agencies make larger profits the cheaper the inventory is that they purchase for advertisers. This can incentivize agencies to offer advertisers cheaper low quality inventory instead of purchasing ad space that is more expensive yet better for the advertiser.

TRANSPARENCY AND QUALITY OF INVENTORY

Media companies and agencies typically buy ad inventory for advertisers using a computer program called a DSP(Demand Side Platform). It allows them to:

  • Select what types of ads they purchase
  • Choose which websites their ads show up on
  • Set a price of how much they are willing to pay for the ads
  • See statistics about campaigns such as impressions, clicks, and viewability (the percentage of ads that were seen by a human)

When using CPM pricing, many of these things are often not revealed to the advertiser. But why would advertisers want to know that much detail about their campaigns? Most are busy trying to run their businesses and don’t have time to try and understand all the technical aspects of online advertising. However, this lack of transparency has led to online ads being sold to advertisers commonly for over 300%+ of what they are purchased for within a DSP.


In addition to limited transparency on pricing, there is also next to no transparency as to which websites the ads are shown on. Bigger brand name websites tend to be higher priced to advertise on than poor quality websites that often have much lower viewability. Most advertisers would want to be seen on high quality websites where their ad is seen frequently, but the CPM model by nature can motivate agencies to pursue cheap, low quality inventory in order to make money.

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EXAMPLE DISPLAY CAMPAIGN

To demonstrate our point, we ran a simple display ad campaign to compare thousands of websites and their CPMs. Below are a few examples. Note – pricing on these websites can increase or decrease based on targeting and competition.

POPULAR WEBSITES
WITH HIGH VIEWABILITY

Website Average CPM
HGTV.com $3.17
Menshealth.com $2.86
FoodNetwork.com $2.79
DIYnetwork.com $2.53
CBSsports.com $2.02

LOW QUALITY WEBSITES
WITH LOW VIEWABILITY

Website Average CPM
GPUcheck.com $0.09
Qianmxi.com $0.09
Blabber.buzz $0.15
Winlootsweepstakes.com $0.29
Derivative-calculator.net $0.53

Low Quality Website Example: This is an example of GPUcheck.com that had 3 video ads auto play on screen at once with display ads on top of each other so they are hidden to the visitor. (and yes, advertisers still pay for those impressions). It’s viewability percentage was recorded at 1.9%.

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The New Model:
Percent of Ad Spend

WHAT IS THE PERCENT OF AD SPEND MODEL?

The percent of ad spend model (or “margin”) is simply charging advertisers a percentage of their spend as a fee while being completely transparent as to what the agency is paying for inventory. For example, our agency charges a 30% margin instead of a set CPM for display and video ads. This pricing model is commonly used in pay per click advertising but hasn’t been adopted in display or video advertising.

WHY THIS MODEL WORKS

Using the percent of ad spend pricing model incentivizes marketing agencies to get better results for advertisers rather than finding the cheapest inventory to increase their profits.

It allows agencies to offer better inventory than they could with a set CPM if it will help drive better results.

And if the quality of inventory were to remain the same, the advertiser simply will receive exponentially more advertisements than they would on a CPM basis. The clear benefits to advertisers using a percent of ad spend are demonstrated in case studies on the following pages.

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Case Study 1

GOAL

Promote a corporate design conference in Chicago reaching as many relevant people as possible

STRATEGY

Use Display targeting to serve ads to people interested in corporate design

BUDGET

$10,000

Notes: This campaign was run 2 years in a row with the same goals, strategy, and budget. In year 1 the campaign was run in a CPM model and year 2 it was run in a percent of ad spend model.

Year Budget Pricing Model Impressions Clicks Click Through Rate
Year 1 $10,000 $8 CPM 1,250,000 1,875 0.15%
Year 2 $10,000 30% of Ad Spend 7,368,421 28,736 0.39%
Year Year 1 Year 2
Budget $10,000 $10,000
Pricing Model $8 CPM 30% of Ad Spend
Impressions 1,250,000 7,368,421
Clicks 1,875 28,736
Click Through Rate 0.15% 0.39%

TAKEAWAY

The percent of ad spend model allocated a much larger portion of the client’s budget towards media spend allowing for 5x the impressions. This model also allowed for a focus on much higher quality impressions leading to a large increase in CTR and clicks.

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Case Study 2

GOAL

Increase brand awareness for a law firm in Wisconsin

STRATEGY

Use YouTube TV and TrueView to get the most reach with our budget.

BUDGET

$100,000

Notes: This campaign is using CPV (cost per view) which is commonly used for YouTube campaigns. Though it is different than CPM it is the same concept. We used our actual campaign and two theoretical campaigns using actual pricing from local media companies.

Campaign Budget Pricing Model Final Cost Per View Views
Our Campaign $100,000 30% of Ad Spend $0.013 5,384,615
Media Company #1 $100,000 $0.40 CPV (they don’t share with advertiser) 250,000
Media Company #2 $100,000 $0.25CPV (they don’t share with advertiser) 400,000
Campaign Our Campaign Media Company #1 Media Company #2
Budget $100,000 $100,000 $100,000
Pricing Model 30% of Ad Spend $0.25CPV $0.40 CPV
Final Cost Per View $0.013 (they don’t share with advertiser) (they don’t share with advertiser)
Views 5,384,615 250,000 400,000

TAKEAWAY

In order to get the same amount of impressions, with media company #1, the law office would have had to spend $2,153,846 and with media company #2 they would have had to spend $1,346,153.

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