4.1 Online Advertising
4.1.3 Pricing Models for Online Advertising
As advertising should serve specific business objectives, organizations can spend a certain amount of money on online ads. The price organizations are willing to pay usually depending on their total budget and on the relevance of the corresponding business objective (e.g., which may be higher for sales than for subscriptions to a newsletter).
Although some online ads can be free, the majority are paid ads. It is important to know that the online advertising prices are not stable and usually depend on a bidding process. Similar to an auction, space for ads is rather sold to the best bidder. In other words, organizations usually can’t buy ad space, but they can only bid. In particular, the price per ad may depend on factors such as the demand for ad space, potential reach of ad space, the keywords, and the location on a web page (among others), namely:
• Demand for ad space. If many organizations wish to show an ad at the same time, then the price per ad is likely to increase.
• Reach of ad space. The more visitors, users, or accounts a publisher has (e.g., a search engine, blog, or other social media tools), the higher the requested price for online advertising. For instance, in 2012, Facebook™changed the personal email address of its users into a new Facebook™ address (i.e., ending with
@facebook.com) in order to stimulate its users to visit the tool more frequently and thus to boost advertising sales (BBC2012b).
• Keywords. The price per ad can also increase if many ads are linked to the same keyword (e.g., if many competing ads use “smartphone” as a keyword).
Choosing the right keywords is particularly important for targeted (e.g., contextual) ads.
• Location on a web page. Eye cam research has investigated how people generally look at a web page. It turned out that people tend to look more at the upper part of a web page and particularly the upper left corner (Lee2005). This most viewed area is thus the ultimate space for ads and therefore more expensive.
Given the high costs that can be linked to online advertising, an organization should decide beforehand (1) on the maximum amount of money to be spent and (2) on thepricing model(e.g., maximum 40 cents per click). Particularly, a pricing model determines when the organization (i.e., advertiser) needs to pay per ad.
The most common pricing models are (Fjell2008):
• Pay-per-view. An advertiser pays for each unique user view of the ad (i.e., per appearance or per impression). Alternatively, an advertiser can pay per 1000 impressions of the ad (i.e.,pay-per-mille).
• Pay-per-click. An advertiser pays each time a user clicks on the ad and is redirected to the corporate website.
• Pay-per-action (or pay-per-performance). An advertiser pays each time a user clicks on the ad and completes a transaction or business action (e.g., ordering products, completing a form, registering for a newsletter, etc.).
Other pricing models also exist:
• Fixed cost. An advertiser pays one fixed amount of money, independent of the performance outcomes.
• Pay-per-visitor. An advertiser pays per visitor of the corporate website, inde- pendent of the ad.
• Etc.
Nonetheless, the concrete bidding processes vary and can depend on diverse factors. For instance, for more information on Google™’s bidding process (includ- ing the factors to determine the position and rank of an ad), see https://www.
youtube.com/watch?v¼PjOHTFRaBWA#t¼444 (Google Adwords 2014). This example shows that a higher ad position not only depends on the bid but also on the quality of the content in the ad and the content on the landing page (i.e., the corporate web page that has a direct link in the ad).
Figure 4.2 shows the actors involved in online advertising. It concerns the organization as an advertiser, the web master as a publisher, and possibly an intermediate ad server vendor in case of a content network (see Sect. 4.1.1).
Hence, the bidding process can be managed in a direct way (i.e., solid line) or an indirect way (i.e., dashed line).
As the prices for online ads strongly depend on a bidding process, one can also talk about a “bidding war” among organizations or advertisers (Pasternack and Lee 2003). An organization’s bid is the budget that it is willing to spend, which should not be higher than the maximum budget to be spent. As shown in Fig.4.2, bidding wars can be directly organized by the publisher who sells ad space, e.g., the owner of a website, a blog, or other social media tools. Particularly, the business models of those social media tools that offer free user accounts are likely to rely on advertising or selling client information to third parties instead (see also Chap. 8 on social network data). For instance, organizations can directly contact Facebook™ for advertising purposes (seehttps://www.facebook.com/advertising). However, more frequently, an intermediate ad server vendor coordinates the bidding process (e.g., in a content network such as Google™, Yahoo!™, or AOL). As Google™is the largest search engine worldwide (see Chap. 6), it also dominates the market of online advertising as an ad server vendor. One of the advantages of working with an intermediate actor or popular social media tool is that they frequently provide access to dashboards with real-time statistics related to the ad (e.g., how many times the ad was shown, how many clicks, etc.).
During a bidding process or bidding war, an organization can try tonegotiate about the pricing models. Furthermore, ads in top positions are usually more expensive (e.g., at the top of a website or first in a list of ads). The main reason is illustrated by eye cam research (Lee2005), as previously explained. For instance, the more clicks are expected, the higher the pay-per-click will be. On the other hand, more clicks may also result in more people who conduct the desired business action. However, such business outcomes remain unsure as users also take into account the quality of the ad’s content and the corporate website, besides merely the ad’s position. For instance, Chakravarti et al. (2006) distinguish prescreening information (i.e., the ad’s position) from post-screening information (i.e., the content). Consequently, one may wonder whether ads in top positions are still profitable (Agarwal et al. 2011). They can be expensive (e.g., €10 per click for ads in top positions that use popular keywords), while the business outcomes do not necessarily follow. Hence, for some organizations, it might be better to target ad space that directly comes after the top positions.
A final remark regarding the price of online advertising deals withclick fraud, which is especially important for a pay-per-click pricing model. Click fraud refers to an abuse of clicking on a certain ad, without any interest in the corporate content
Advertiser with ad
Ad server vendor (= intermediate ad network, possibly providing dashboards
with real-time statistics)
Publisher with website or social media tool Fig. 4.2 The actors involved in online advertising
or website. For instance, an unethical use of ads is clicking on ads for fun and immediately leave the corporate website without looking at the content (i.e., deliberate bouncing; see Sect.4.1.5). If the organization agreed to pay a certain amount per click, then the advertising costs will increase without corresponding business outcomes. Moreover, when professional clickers are hired to increase the profit for a publisher or an ad server vendor, click fraud becomes a real situation of business fraud and thus illegal. For instance, newspapers sometimes report on a high number of fake social media users who frequently click on social media ads or who can increase the price per ad (BBC2012a).