The Myth Behind 'Cost-Per-Click'
These parallels have made the Web a comfortable medium for those who understand the principles of direct marketing.
While the CPM pricing model, which is based on cost-per-thousand impressions, has become the accepted standard for advertisers, a model based on cost-per-click has been a topic of discussion. Let's take a closer look at the two pricing models and their effects on the Web as a direct response medium.
The cost-per-impression pricing model was one of the earliest web pricing models, in addition to a model based on a flat monthly rate. What really secured the CPM pricing model was the sophisticated tools for measurement, reporting and tracking. Back-room server-side software brought a whole new level of sophistication and information to advertisers, specifically quantifiable impression and click-through levels.
You can look at the overall impressions delivered by carefully selected sites as being analogous to a targeted prospecting universe. The banner's creative is a hybrid combination of a direct mail piece's outer envelope as well as the offer, with its localized "call to action" being a click.
The cost-per-click pricing is exactly as it is titled -- the advertiser pays based on the number of clicks received. From the outset, it sounds like a good deal. The problem is that for true direct marketers, the cost-per-click hinders the "direct response" element from the Web. It does this by inhibiting a marketer's flexibility in changing the creative/offer because of the pricing structure. Let's take a closer look.
The math is fairly straightforward. Let's use as an example a CPM model priced at $20/M. At 100,000 impressions, that costs the advertiser $2,000. To spend the same $2,000 in a cost-per-click model, we could pay $1 per click (a typical cost-per-click price) for 2000 clicks.
In the CPM pricing model, the overall cost is fixed, with the variable being our response rate. In the cost-per-click model, the cost is directly proportional to the response rate. The removal of the fixed cost, regardless of the response rate, is what eradicates the "direct response" component when using the cost-per-click model.
Why? Well, as a direct marketer, you would mostly likely be inclined to change your banners, testing different creative/offer bundles. Perhaps you are going to introduce a special premium, which is going to give a sharp rise in your click-through rate.
Or, perhaps you are changing your sales model to perform a multi-staged sales effort -- so you're giving away something for free in exchange for acquiring U.S. and/or e-mail address information. With the cost-per-click model, you wind up getting penalized for generating more responses.
While the cost-per-click is an attractive package up front, its attractiveness quickly wears off as an entrant in the web-marketing arena turns from "amateur" to "pro."
In my opinion, the cost-per-thousand model makes much more sense through the eyes of the marketer. It allows someone who knows what they're doing to take true advantage of this interactive and flexible direct response medium.
Roy Schwedelson (firstname.lastname@example.org; www.worldata.com) is CEO of Worldata Inc., a list marketing, electronic marketing and database services company specializing in the hi-tech and microcomputer markets.