Sponsored Search: Question 3 - Pricing

Consider the three pricing criteria introduced and discuss the applicability of each. How should search engines offering mentioned advertisements best decide on pricing policies? Is there a difference between pricing in various industries?

Can you list the three pricing criteria and give them a brief (one sentence each) definition?

There are 3 pricing criteria
- pay-per-impression (PPI): The advertiser pays the search engine everytime the as is shown
- pay-per-click (PPC): the advertiser pays each time a consumer clicks on the ad
- pay-per-action (PPA): the advertiser pays when a concrete action (filling out a form, sale, etc) takes place

Let's take an example. You are the advertiser of Din Tai Fung in Taiwan, famous restaurant. Which mechanism (PPI model, PPC model or PPA) seems the best for your business?
In your opinion, how would you chose the attributes for the keywords (exact match or broad match) and when should you bid the most on your keywords (depending the time of day?)?

Let's make a fine distinction between pricing and payment: Pricing is the level an advertiser pays and the mechanism that decides the level; whereas payment is the way the advertiser pays. In the sponsored search ads, typically pricing mechanism is referred to using auction to decide the price level of a key word, and payment mechanism (i.e., pay-per-impression, pay-per-click, and pay-per-conversion) is related to what kind of effect (e.g., awareness, preference, or action) that an advertiser intends to achieve.

Hey,

i really believe this question is pretty hard, but here are some of my thoughts:

First, I think the difference between PPI, PPC and PPA should be assess considering what kind of effects you expect:
- If you are a Start-up, you want people to be aware of your business as you need to grow your traffic, so i'd say everytime the ad is shown: PPI. And you have to make sure you pay for a limited amount of impressions, otherwise it's not sustainable, but in the short term that's a good way to communicate your business, it's like flyers..
- if you are an air company, definitely PPC as one the users are on your home page, you can expect them to book their flights..
- More Generally, If you are a service provider, such as a restaurant, let's say Din Tai Fung, what you want is to make people come to your restaurant: so I'd say PPC if by clicking on the ads you enable the customers to have a discount (5-10% or free drinks) or a coupon, that way you can ensure the fact that if you pay a CPC (cost-per-click), the conversion from this click to a potential customer can be high. Otherwise, I'll choose PPA but I don't think it'll be really different from other types of marketing or ads.

Then concerning the way you price these, I'd say: the CPC will be defined by an auction, and the more competitive the sector/market is, the higher the CPC will be.
Concerning the impressions (PPI), I'd say one unique amount and you set before an specific number of impressions. You set the deal and pay it in advance. (that's not really flexible, but that's not the point, here we want flexibility)
Concerning PPA, maybe a percentage of the order made, either on the amount paid for the order or a pre-determined percentage (1-2%).

Thanks!

I agree with Laurent about the differences in payment mechanisms.
Here is another way to sum it up:



Note: CPM is Cost Per Mille (cost per thousand impression)

Source of the table: IDATE (2010), "DigiWorld Yearbook 2010"

This is a very interesting question! It would have been nice to have some specific figures and numbers but I cannot find any right now. Of course, a company wants to be listed on top - preferably at the lowest possible price. This means, that it would be useful to know beforehand, how many percent of the users notice the sponsored links and how many actually click on them (and I am sure, this data exist and can be bought). It seems obvious, that one would prefer PPC and so "only" pay for the advert when it proves successful (i.e. when someone actually clicks on the advert) but this is rather expensive, I would imagine. Having data on previous keywords/hits would probably answer the question but unfortunately, we don't have that data.

I like Laurent's approach, saying that a start-up would do better with PPI because it will generate some attention - just like a flyer. On the other hand, I rarely click on adverts from unknown companies (i.e. a start up) because there are just too many and they really have to be special to catch my interest (and I also usually cast a glimpse on a flyer and then throw it away).

To name a specific example, I have probably clicked on a facebook advert less than 20 times in my life. But today, I saw a BMW advert and as I love cars and BMW, it caught my attention and I did click on it and was redirected to their site. This is ONE click (=success) in a few months. To me, that doesn't seem like a good rate!?

Now, in a perfect world, these would be perfect steps for facebook:
1. facebook stops spamming me with all those adverts that are of no interest to me (cute games, hotel rooms, eye laser surgery, banks and adverts where I don't even understand what they are offering -> these are real adverts that I just checked on fb now!)
2. facebook finds out what my interests are (cars, motorcycles, etc.)
3. facebook learns which car and motorcycle brands and models I am interested in
4. facebook posts only adverts of interest to me

Of course, I didn't come up with a new great science here, but still the last 40 adverts (I refreshed my browser 10 times and looked at all the adverts) were of no interest whatsoever to me, so there is great space for improvement here!

Now that being said, I am not sure if I want facebook (or google or whatever) to know everything about me. I am actually pretty ambiguous about this point. On one hand I only want to see hits that are actually of interest - on the other hand it feels unpleasant that some random company knows "everything" about me. What are your opinion to this dilemma?

I think advertisers will try to combine these three to make their marketing program more comprehensive and cost-effective.
(As long as the sponsored search provider can distinguish the three and maybe offer a budget control tool)
For PPI, it's the extension of ads in the physical world to the online world. The conversion rate of consumer is hard to calculate, but it can build up brand equity, which is still sometimes a must.
PPC & PPA help you "target" customers who are actually interested in your product and only pay for that part of interest.
I suppose PPA needs a more complicated billing mechanism from the provider and imply more value for advertisers, so is going to charge more than PCC.
Therefore, I think the kind of products/services that need more customization to deliver, and will usually establish a long-term relationship with customers would prefer PCA, because PCA can let them acquire more info about their customers. (ex. online-tutoring, ERP/CRM software)
On the other hand, products that are only commodity for mass consumers(ex. garments) are suitable for PPC to gauge general interest in product.

I do agree with Laurent at his point for the applicability, here I just try to say some pros and cons of the three (with some online references).

(1)PPI is very easy to calculate.
The advertiser knows exactly how many times the banner will be shown, and what would be his daily / total costs. However, there's no indications for the advertiser on banner, campaign or media quality, and the correlation with sales or leads is very low.
(2) For PPC, the advertiser knows exactly how many times his landing page(site) will be clicked, and what would be his daily / total cost. Besides it produce more indicators for banner quality. But the advertiser is vulnerable to suffer click fraud.
(3) The mechnisim for PPA is much more complicated than PPI, so if the advertiser has many online payment entrance, this could be chosen. He can be optimized toward paying according to results only, has low vulnerability to frauds, and also be allowed to compete over premium media with high PPI at low risk as long as his campaign is effective. However, It depends more on conversion tracking technology, and advertiser has to risk an initial sum before seeing result.

(Reference: <Tutorial on the CPA / CPM / CPC / dCPM advertising models> By TLV Media)

- pay-per-impression (PPI): The advertiser pays the search engine everytime the as is shown
- pay-per-click (PPC): the advertiser pays each time a consumer clicks on the ad
- pay-per-action (PPA): the advertiser pays when a concrete action (filling out a form, sale, etc) takes place

From an advertiser's perspective I would find it difficult to compare the three metric systems as it is arranged from good (PPI), better (PPC), to best (PPA). It is no different from a customer seeing a store (PPI), entering it (PPC), and finally making a purchase (PPA). Granted there are some products that cannot be purchased immediately over the Internet, but in this digital age, if your can't get your product to an online client, your future is not too bright. Obviously there should be a tiered pricing system for the 3 metrics as exposure is clearly not good enough. As web users, our eyes have been trained to gloss over advertisments which bombard our browsers everyday. It is only when we open our wallets and input our credit card numbers does it become meaningful. Also, I believe a new metric needs to be introduced that would measure if the end user rebroadcasts the information via blog or social media, as word of mouth is incredibly valuable and should be measured in some way. However it is currently not accounted for in the 3 current metric systems, though in this "buzzword" digital economy, may be just as valuable as a direct purchase itself.

I agree with Laurent too, I think you already point out the distinction between PPC, PPI, and PPA.
Here is another website about PPC and PPI:

Pay Per Inclusion Recommendations (in order of importance):
Yahoo! $299 US Annually
Lycos/Fast – InSite Select $35 first $18 additional – Annual fee
AskJeeves/Teoma – $30 - Annual fee
WhatUseek Collection $49 Annually

Pay Per Click Recommendations:
Yahoo Search Marketing
Signup fees - 2 plans
Fast Track = $199 or Self Service = $0
Fast Track is quicker and guaranteed within 3 days the other could take from 5 days to 10 days.

Pros:
Top ranking in Yahoo, MSN, AskJeeves, AltaVista, Lycos and others.
Cons:
Can be the most expensive based on how competitive the keywords are.
Prices per click can range from $0.10 to $15.00+ per click.
Competitive advertisers are estimated to spend over $18,000 per month.

From the data above, we can see the price different between PPC and PPI,
which can correspond with what Laurent had mentioned.

About the dilemma LeeAnn has came out, it is always something that user are concerned about. We always hope the system can do more for us, but at the same time we also don't want them to save our data. (There's a Chinese phrase say that you can't ask a horse to run fast without feeding it.) In my own opinion, if you are really worried about your data been stolen, then it should not be online in any matter. Anything you say, post, or put online will become public and you have no way to protect it. What we can do might be choosing a provider who has more credibility!!!

- pay-per-impression (PPI): The advertiser pays the search engine everytime the as is shown
- pay-per-click (PPC): the advertiser pays each time a consumer clicks on the ad
- pay-per-action (PPA): the advertiser pays when a concrete action (filling out a form, sale, etc) takes place

If I'm search engines, of course I want to offer PPC, which is easy to count and easy to earn money.
If I really offer PPC but I'm not think of my Ad customer, I'll just put Ad on the place where searcher easy to click careless, or have a interested title to make searcher click.
But PPC for Ad is not very useful. Most of clickers are curious or careless to click, without any purpose.
Combine both search engine and Ad view, PPC isn't a win-win solution, so this way won't be the best one.

PPI is more useful to Ad provider. Searcher need find specific thing and you are the top result, then it's big possibility Searcher will click in and view page. This is a good way in both side, search engine is easy to earn money, Ad provider get business.
But everyone noticed that PPI is a good way for marketing, so many of your competitor also want to get the place put their Ad,this make prices goes very expensive.

PPA is also a good way for Ad provider, which you can make sure you really get customers.
On search engine side, it's not an appropriate way to earn money.
Search engine's responsibility is provide search result, he should care about whether clicker want to use Ad provider's service or product.
But PPA force search engine to care about thing not his business, so he won't willing to provide this kind of solution unless every valid click charge an expensive price.

So I think PPI is the most win-win pricing policy for both side.

This is a very hard question but here is what I would like to add to previous posts.

To me, the basic assumption in pricing is that a price should be fixed at the level customers are willing to pay. So the whole question here is to know how much an advertiser is willing to pay for its ads. Then the search engine should fix the price to this level.

The whole issue for the engine is to determine how much income will the advertisement generate for the company. Then the price of the advertisement should be determined proportionaly to this additional income.

In different industries, different pricing methods should be used. Indeed, the amount of conversion between ads being shown/ ads being clicked/ action being made varies a lot. As a result, the prices of PPI/ PPC/ PPA should vary depending of these ratios.

For example, imagine an ad for a car company, like Ford. The ad will probably appears a lot. Indeed, whenever someone searches "buy a car", the ad will appear. Still, only a few customers will go to Ford website, as they might not want to get this brand. After customers go to Ford website, only few will eventually buy the car. For this case, PPI should be cheaper than PPA proportionaly, as the ratio of actions/ ads shown will be very low.

These ratios depend on every industry and have to be determined depending on the previous statistics.