There are a lot of TLAs (Three Letter Acronyms) used in Internet advertising to describe different purchasing models. In this article, three common purchasing models are examined including cost per thousand impressions, sometimes referred to as CPM – where M stands for milli meaning 1/1000 (like in the metric system), cost per click, sometimes referred to as CPC and cost per acquisition sometimes referred to a CPA (not to be confused with your accountant!).
To look at these three Internet advertising purchasing models and understand the context one has to look back to the beginning of the Internet advertising industry which was born almost immediately after the Internet became mainstream in the mid 90s. During its infancy, Internet advertising was sold much like traditional media in that an advertiser would pay a publisher a fixed rate per ad impression displayed (and potentially seen). This was natural since traditional media had been bought and sold based on metrics like audience size for TV or radio or circulation for print advertising. In this media purchasing model, the only thing the advertiser knows for certain is how widely the advertisement was distributed and not necessarily how many people saw the ad or took some kind of action as a result.
As time wore on and the Internet advertising industry matured, advertisers demanded more accountability in their online media spend. This accountability was driven in part by the fact that the Internet itself presents many opportunities for measurement, tracking, and reporting. Due to the measure-ability of the medium, advertisers began claiming that they only pay Internet publishers for advertising when a visitor interacted with their advertisement. This purchasing model emerged as the cost per click model otherwise referred to as purchasing Internet advertising on a CPC basis. In the CPC model, the publisher shares the risk with the advertiser in that the publisher only gets paid by the advertiser when one of their visitors clicks on the advertisement and is transported to the advertiser's website. As you can imagine, advertisers preferred and publishers took on more risk as their revenue now became dependent on factors such as click through rates otherwise known as CTR.
Now, in contemporary Internet advertising markets, it's not uncommon to see more and more large, influential advertisers demanding online purchasing models wherebe publishers only get paid when a visitor clicks on the advertisers ad, goes to the advertiser's website then suddenly takes a desirable action. The action could have been the purchase of a product for an e-commerce advertiser or could be the submission of personal information for advertisers focused on lead generation. The important point is that in this purchasing model, all of the risk has been shifted to the publisher. "Pay-for-performance" advertising is the most risky advertising model for the publisher and least risky for the advertiser. One can imagine that publishers are more invested in not only the quality of the online ad, but also the quality of the landing page and related offer when accepting ads on a CPA basis. This is only fair given the publisher's risk acceptance in promoting the advertiser's offers on a pay-for-performance basis. On large-scale online media buys, this is where very careful negotiation takes place. On smaller scale CPA buys, 3rd party affiliate networks connect advertisers with publishers.
In an industry much like other technology industries fraught with jargon and acronyms, the Internet advertising industry has its own language. Those new to Internet advertising, especially media buyers, are encouraged to familiarize themselves with common industry jargon in order to become educated, savvy media buyers and extremely, successful online advertisers.