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Pricing Models for Online Advertising: CPM vs. CPC

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  • Kursad Asdemir

    (Faculty of Business and Economics, United Arab Emirates University, Al Ain, United Arab Emirates)

  • Nanda Kumar

    (School of Management, University of Texas at Dallas, Richardson, Texas 75083)

  • Varghese S. Jacob

    (School of Management, University of Texas at Dallas, Richardson, Texas 75083)

Abstract

Online advertising has transformed the advertising industry with its measurability and accountability. Online software and services supported by online advertising is becoming a reality as evidenced by the success of Google and its initiatives. Therefore, the choice of a pricing model for advertising becomes a critical issue for these firms. We present a formal model of pricing models in online advertising using the principal--agent framework to study the two most popular pricing models: input-based cost per thousand impressions (CPM) and performance-based cost per click-through (CPC). We identify four important factors that affect the preference of CPM to the CPC model, and vice versa. In particular, we highlight the interplay between uncertainty in the decision environment, value of advertising, cost of mistargeting advertisements, and alignment of incentives. These factors shed light on the preferred online-advertising pricing model for publishers and advertisers under different market conditions.

Suggested Citation

  • Kursad Asdemir & Nanda Kumar & Varghese S. Jacob, 2012. "Pricing Models for Online Advertising: CPM vs. CPC," Information Systems Research, INFORMS, vol. 23(3-part-1), pages 804-822, September.
    • Handle: RePEc:inm:orisre:v:23:y:2012:i:3-part-1:p:804-822
    DOI: 10.1287/isre.1110.0391
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    6. Kaichen Zhang & Zixuan Yuan & Hui Xiong, 2024. "Optimized Cost Per Click in Online Advertising: A Theoretical Analysis," Papers 2405.14279, arXiv.org.
    7. Subodha Kumar & Xiaowei Mei & Liangfei Qiu & Lai Wei, 2020. "Watching Ads for Free Mobile Data: A Game-Theoretic Analysis of Sponsored Data with Reward Task," Working Papers 20-08, NET Institute.
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    15. Yu (Jeffrey) Hu & Jiwoong Shin & Zhulei Tang, 2016. "Incentive Problems in Performance-Based Online Advertising Pricing: Cost per Click vs. Cost per Action," Management Science, INFORMS, vol. 62(7), pages 2022-2038, July.
    16. Cinzia Battistella & Gianluca Murgia & Fabio Nonino, 2021. "Free-driven web-based business models," Electronic Commerce Research, Springer, vol. 21(2), pages 445-486, June.
    17. Thomas W. Frick & Rodrigo Belo & Rahul Telang, 2023. "Incentive Misalignments in Programmatic Advertising: Evidence from a Randomized Field Experiment," Management Science, INFORMS, vol. 69(3), pages 1665-1686, March.
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    19. Mariusz Duka & Marek Sikora & Artur Strzelecki, 2023. "From Web Catalogs to Google: A Retrospective Study of Web Search Engines Sustainable Development," Sustainability, MDPI, vol. 15(8), pages 1-16, April.
    20. Duan, Yongrui & Liu, Peng & Feng, Yixuan, 2022. "Pricing strategies of two-sided platforms considering privacy concerns," Journal of Retailing and Consumer Services, Elsevier, vol. 64(C).
    21. Qian, Zhifeng & Day, Steven James & Ignatius, Joshua & Dhamotharan, Lalitha & Chai, Junwu, 2024. "Digital advertising spillover, online-exclusive product launches, and manufacturer-remanufacturer competition," European Journal of Operational Research, Elsevier, vol. 313(2), pages 565-586.
    22. Magdalena Iordache Platis & Cosmin Olteanu & Anca Luiza Hotoi, 2022. "Evolution of the Online Sales of Sustainable Products in the COVID-19 Pandemic," Sustainability, MDPI, vol. 14(22), pages 1-16, November.

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