There are 3 pricing models available to use in online advertising, the oldest is the cost per thousand (CPM), more recently, cost per click (CPC) and the newest is cost per action (CPA).

Cost per thousand (CPM)

CPM pricing was promoted by big portals such as Yahoo and AOL. It was a great revenue generator and largely risk free. The advertiser did all the creative work and made the payments, the only thing the portals had to do was display the ad as often as they could until the advertiser’s budget was exhausted.

Cost per click (CPC)

CPC involves risk from the advertiser’s side because they pay for every click on their ad, this forces them to make sure the ad is relevant to the target market. At the same time, the publisher takes on the responsibility of displaying the ad in appropriate places so that it will receive clicks. No clicks, no revenue.

Cost per action (CPA)

CPA offers the best guarantee for advertisers as they only pay when the prospect has performed a specific action such as registering or requesting information. The ad can be displayed and clicked as many, many times with no cost to the advertiser. The problem here is that now all the risk has been shifted to the publisher since they now must give up their ad inventory and hope that the advertiser’s message is compelling enough to result in “actions”.

Conclusion

This sharing of risk and the simplicity in measuring performance is why CPC has become popular. It has been so successful, that Google generates most of its revenue by playing the middleman between advertisers and publishers. The one problem with CPC ads is that they are subject to click fraud.

Use CPM option when your goal is to have your brand in front of a large number of people, very quickly.

Use CPC when conversion is your goal, you can use this model during the testing phase of any ad campaign. Over the long-term, CPC can be very cost-effective as your click price drops when your ad is very popular. If your ad has a strong call to action (register, make a purchase, join a webinar, etc), CPC will most likely deliver the best ROI (return on investment).