There are four common pricing models used in the online performance advertising market. CPM (cost-per-mille, or cost-per-thousand), CPC (cost-per-click), Cost per lead (CPL), Cost Per Action (CPA)
CPM (cost-per-mille, or cost-per-thousand) pricing models charge advertisers for impressions, i.e. the number of times people view an advertisement. Display advertising is commonly sold on a CPM pricing model. The problem with CPM advertising is that advertisers are charged even if the target audience does not click on the advertisement.
CPC (cost-per-click) advertising overcomes this problem by charging advertisers only when the consumer clicks on the advertisement. However, due to increased competition, search keywords have become very expensive. A 2007 Doubleclick Performics Search trends Report shows that there were nearly six times as many keywords with a cost per click (CPC) of more than $1 in January 2007 than the prior year. The cost per keyword increased by 33% and the cost per click rose by as much as 55%.
In recent times, there has been a rapid increase in online lead generation – banner and direct response advertising that works off a CPL pricing model. In a cost-per-lead pricing model, advertisers pay only for qualified leads – irrespective of the clicks or impressions that went into generating the lead. CPL advertising is also commonly referred to as online lead generation.
Cost per lead (CPL) pricing models are the most advertiser friendly. A recent IBM research study[citation needed] found that two-thirds of senior marketers expect 20 percent of ad revenue to move away from impression-based sales, in favor of action-based models within three years. CPL models allow advertisers to pay only for qualified leads as opposed to clicks or impressions and are at the pinnacle of the online advertising ROI hierarchy.
In CPA advertising, advertisers pay for a specific action such as a credit card transaction (also called CPO, cost-per-order).
Advertisers need to be careful when choosing between CPL and CPA pricing models.