Performance-based advertising

Performance-based advertising, also known as pay for performance advertising, is a form of advertising in which the purchaser pays only when there are measurable results. Performance-based advertising is becoming more common with the spread of electronic media, notably the Internet, where it is possible to measure user actions resulting from advertisement.

There are four common pricing models used in the online performance advertising market.

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 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.

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