"Pricing of Advertisements on the Internet"

The internet is increasingly becoming an attractive channel for advertising. Further, the market for online ads in the US is expected to grow to $26 billion by 2010. The beneficiaries of this growth in online advertising revenue are web publishers or portals on the one hand, and search engines on the other. While internet users visit web publishers for their information content, they visit websites of search engines to search for the internet addresses of publishers or for the addresses of online sellers of specific products.

Traditionally, publishers have sold display advertisements (hereafter, simply ads) such as banner ads to advertisers interested in reaching visitors to their websites. In this case, advertisers primarily relied on the number of impressions or 'eyeballs' delivered by the publishers and the asking price for the ad space, in choosing where to advertise.

More recently, search engines such as Google have given a new impetus to online advertising by selling search-related ads that are placed alongside search results delivered to users. Advertisers in this case have much more than an average demographic characteristic of the search engine user to go by in gauging the usefulness of advertising.

Search engines such as Google have given a new impetus to online advertising by selling search-related ads.The search keyword such as 'wall clock' that is entered by the search engine user reveals a specific interest in the product or even the brand, and this makes the user a valuable prospect to sellers of the product. This advertising innovation has made search-related advertising the fastest growing component of online advertising.

The success of search-related advertising has enabled Google to extend this idea to placing context-related ads at the website of publishers.

Just as online advertising has evolved from banner ads to search- or context-related ads, pricing of online ads to advertisers has evolved over time. In the early days of the World Wide Web, the pricing model for online ads imitated that used for traditional offline media such as print and TV, with the publisher charging a flat fee for displaying a fixed number of impressions of an ad. Since this flat fee was usually computed based on thousand impressions, this pricing model came to be known as CPM (cost-per-thousand).

Subsequently, CDNow.com introduced the idea of paying web publishers based on click-through generated from ads or links placed on the publishers’ website. Since the advertiser is charged only when a consumer clicks on the displayed ad, this pricing model came to be known as cost-per-click (CPC).

In basing payment on clicks, the CPC pricing model capitalised on the ease of measuring consumer response in the internet medium.Many advertisers preferred CPC over CPM because the former is more closely linked to an ad’s performance. In 2003, another innovation was introduced by GoTo.com when it auctioned the ad space to the highest bidding advertiser. This auction model is now commonplace in the search related advertising category, where specific search keywords such as 'wall clock' are auctioned, and advertisers use automated bidding software to submit bids per click for millions of search keywords.

A pricing model that is even more closely tied to performance is one where the publisher is paid only when the click results in a purchase.

Google recently made an interesting announcement -- that it would also accept bids per impressions for its context-related ad services. In sum, pricing models for online advertisements differ on whether payment is based on impressions or clicks, and on whether the price per click or impression is posted or decided through an auction.

In this context, a pricing model that is even more closely tied to performance is one where the publisher is paid only when the click results in a purchase. This model is also used in internet advertising. A distinguishing feature of our analysis is that it considers the effect of product-market positioning of online advertisers on their bids for online ads and the consequent implications for pricing policies.

Thus it considers the following research questions:
1.What are the implications of pricing based on impressions versus clicks?

2. How is pricing for search- or context-related advertising different from other less precisely targeted advertising methods?

3.What are the implications for volume discounts given for higher click through rates (CTR) of an ad?

4.What are the implications of alternate policies for choosing the winning bidder for advertisements?

With respect to the last question, two policies for choosing the winning bidder are observed in the online advertising industry. In one policy the advertiser who bids the highest CPC is considered the winning bidder. On the other hand the second one derives a rank score by multiplying the maximum CPC bid by an advertiser for a search keyword with a quality score that increases with the advertiser’s CTR, and the winning advertiser is the one with the highest rank score.Offline ads can increase advertisers’ profit from online advertising suggesting that a synergy exists between these forms of advertising.

Finally, the impact of offline ads by the advertiser on the profitability of online advertising to the advertiser and publisher is considered. This is an important issue facing marketing managers as they decide how to coordinate offline and online advertising in their marketing mix.

Here, we assume that the products of these advertisers are positioned to appeal more to one of two different consumer segments. Our main conclusions are as follows:

* Bidding based on impressions or clicks yield surprisingly equivalent results in terms of advertiser and publisher profits. On the other hand, advertising placed with knowledge of a search keyword or context can be more profitable for the advertiser.

* It can also be found that, the volume discounts based on number of clicks or impressions can increase the publisher’s profit while also maximizing the profit of the channel consisting of the publisher and advertiser.

* Lastly, offline ads can increase advertisers’ profit from online advertising suggesting that a synergy exists between these forms of advertising.


Article by: Subramanian Balachander & Karthik Kannan, Assistant Professors of Management, Krannert School of Management, Purdue University, USA