Web Advertising Basics: Overview of Ad Revenue Models

One of the most confusing aspects of Web advertising is the choice of revenue models for ads. Each has its advantages and disadvantages, and which you use will depend on your site's audience. The following is a basic overview of each of the common revenue models for Web ads.

Cost per Impression (CPM)

One of the simplest types of ad revenue, and the first to emerge when Web sites started advertising, is the CPM ad. The term CPM means cost per thousand impressions and refers to the amount you are paid for showing 1000 ads. For example, suppose an ad campaign pays $1.00 CPM. You would earn one tenth of one cent each time a user views the ad for a total of a dollar after a thousand views.

In practice, you may not earn the full amount for every impression: if you are using an ad agency, they take a percentage of the income. Additionally, you may be paid for unique impressions—usually meaning you will only be paid the first time each unique visitor sees a particular ad. Be sure to check the fine print before making assumptions about how much money you'll earn.

Currently, $1 CPM is actually a pretty good rate for banner ads, and on a busy site you'll likely end up using ads that pay less to fill your inventory. Other ad formats, such as skyscrapers, pop-unders, and pop-ups, should pay higher rates.

Cost per Click (CPC)

Some advertisers want to pay for immediate results rather than views. A cost per click (CPC) ad pays you a certain amount—typically between a nickel and fifty cents—each time a user clicks on an ad. As with a CPM ad, you may only be paid for the first unique click from a particular user, and your ad agency may take a percentage.

Running a CPC ad presents an element of risk: if no users click the ad, you don't earn anything. Nonetheless, if an ad's target audience matches the audience of your site, you can often earn more than low-end CPM ads.

Since the performance of CPC ads will vary widely between particular ads and particular sites, they are often discussed in terms of effective CPM. This is how much money an ad has made you based on the number of views. For example, if you run 1000 impressions of an ad that pays 25 cents per click and four users click on it, you have an effective CPM of $1.00.

Cost per Action (CPA)

While you earn money instantly when a user clicks on a CPC ad, CPA (cost per action) ads require more of a committment from the user. You are paid each time a user completes a particular action—for example, completing a survey, signing up for a subscription, or buying a product.

CPA ads are typically used with affiliate programs. There are two basic types of CPA ad campaign:

• Cost per lead: You are paid each time a user signs up or provides contact information. This usually doesn't require a payment from the user. These programs typically pay somewhere between 50 cents and $3.00 per signup.
• Cost per sale: You are paid each time a user buys one or more products. The commission is usually a percentage of the sale price, so the amount you earn for a sale depends on how much the user spends.

Like CPC ads, the effectiveness of a CPA campaign depends on your audience. Some webmasters make more money from affiliate programs than any other source, because they have found affiliate programs that closely match their audience. If a program does not fit your audience, you may find yourself running thousands of ads without a commission.

Choosing Ads Wisely

Which ads you choose to run depends on your audience, and you'll need to spend some time experimenting to determine what works best for you. In general, you should run as many CPM ads as possible—assuming they are not priced too low to bother—and experiment with CPC and CPA ads to fill the remaining ad inventory.

Most ad networks attempt to optimize the ads they show for your site, but you may find that some CPC and CPA ads are just giving away free advertising. Be sure to check your effective CPM regularly and run the ads that work best.

Don't forget to look at the ads themselves. These days flashing, seizure-inducing ads are common, and they don't even pay more than the nice respectable ads. I recommend avoiding these ads unless they have a really good price, and there are some flashing ads I won't run at all. If your users are unable to enjoy your content because of an ad, they won't come back, and you'll make less money.