Could a Hybrid CPM/CPE Model Fix Advertising’s Pricing Problems?

I don’t think I’m going to scandalize anyone by saying this: the way the industry prices digital advertising could be improved. Right? We pretty much agree on that? But for the time being, in the absence of anything better, we’re following the status quo because somehow, some way, ad space has to be assigned a value and money has to change hands. It’s not the worst thing in the world, but the fact is we all know it’s time to start rethinking some things.

What’s bothering most of us is that cost per thousand impressions (CPM) may be a convenient pricing model for publishers, but it’s not ideal for advertisers. Number of impressions isn’t really a good indicator of value for any type of digital advertising, but by nature, it falls even shorter with native advertising.

Display ads can be viewed, and they can be clicked, but they can’t really be “shared.” So CPM has been an imperfect model, but still within the ballpark of acceptability, given the inherent limitations of display.

Native advertising, on the other hand, naturally lends itself to deeper engagement, both individually and socially. There’s a huge opportunity for native ad space to be priced based on deeper metrics and a true understanding of the ad’s effect on the audience. Yet right now under the CPM model, a reader who accidentally clicks on and bounces from a 750-word native ad article costs the same as a reader who reads the entire article, emails it to three friends, and shares it with 1,000 followers on Twitter. It’s a bad deal for advertisers who are trying to get the best value for their investment and for publishers who are trying to keep native advertising from becoming a commodity.

As an alternative, advertisers tend to like the idea of moving to a cost-per-engagement (CPE) model because it ensures they pay for quality of interactions, not mere quantity. But there are a couple of obstacles to making this a reality right now.

No Universal Standards of Measurement in Place

When it comes to CPE, there are a few things we, as an industry, still have to define:

What are the agreed-upon measures of engagement?

o   Time spent on page?

o   Amount of article read/video watched?

o   Social shares?

Once metrics are agreed upon, what types of engagement will be considered the most valuable? How should we rank them?

o   Should social shares be valued higher than other types of engagement, and if so, how much higher?

o   Should the type of social share affect the price? Is it worth more if they’re sharing via email (because it’s a more personal recommendation) or if they’re sharing via Twitter/Facebook (because it’s reaching more people)?

o   Should shares by users who have more followers cost the advertiser more?

These questions may be complicated, but they’re entirely possible to answer—it’ll just require the collection and analysis of engagement and results data from a wide swath of publishers and advertisers. The capability to gather that data doesn’t really exist right now, but it’s one of the things we’re working on at ThoughtLeadr. We expect to be in a position to start pushing this part of the conversation forward in the coming months.

Publishers Don’t Benefit from CPE

But another major obstacle to the adoption of CPE pricing is that it isn’t nearly as good for publishers as it is for advertisers. In fact, it puts publishers in the position of staking their revenue on something over which they have very little control.

Engagement depends on the quality of the advertiser’s content, the accuracy of the advertiser’s strategy, and the alignment of the advertiser’s product/service with the publication’s audience, among other things. Apart from putting sophisticated funnels or technologies in place to drive the right readers to the right ads (in other words, making everything much more complicated for themselves), there’s not much publishers can do to drive revenue for themselves in a pure CPE model.

Creating a Hybrid CPM/CPE Model

That’s why, rather than moving toward a pure CPE or CPM model, we want to suggest a hybrid model that would balance the risk between publishers and advertisers.

We’ve heard of publishers trying to bridge the gap between their own needs and their advertisers’ by offering to create the advertiser’s native ad content for free and not charging CPM until the ad reaches a certain number of views, say 75,000 or so.

Our suggestion would be, instead, offering a base CPM (let’s say $3 for this example) with a kicker CPE (15 cents). That way, the publisher is incented to drive quality traffic to its native ads, but it’s also protected from the consequences of unengaging content.

No advertiser feels comfortable knowing 100% of their advertising investment could be going to invisible impressions, and no publisher feels comfortable knowing that their advertising revenue is mostly out of their hands. Make a little concession on each side, and suddenly you have a model that’s much more dynamic for today’s digital market.

Think about it: Everyone benefits from a pricing structure that incents and protects both sides, while also leaving room for more sophisticated analytics to be incorporated as they become available. The pure-CPM era is over. Let’s open up the conversation and start paving the way for something a little more meaningful.