How to Determine Your Ad Platform’s Pricing Model and Rates

Chris Shuptrine
Chris Shuptrine
How to Determine Your Ad Platform’s Pricing Model and Rates

As you build your ad platform, one decision to make is how you will sell and price your direct-sold ads.

Do you charge for clicks or for impressions? Do you set these ad rates yourself, or let advertisers adjust their bids? And if you’re setting them, what prices make sense?

Your choices have real consequences: if costs are too high, advertisers won’t continue spending. But if prices are too low, you leave potential revenue on the table.

To help set reasonable (and competitive) ad prices, we outline considerations to keep in mind when determining your pricing model and ad rates.

Determine your pricing model

Publishers generally offer three main pricing models for their direct-sold inventory: CPM, CPC, and CPA.

Pricing type Definition
Cost-per-mile (CPM) Total cost (ad spend) divided by thousand impressions (mille is Latin for thousand). A $1 CPM across 1 million impressions would be $1,000 in spend.
Cost-per-click (CPC) Total cost (ad spend) divided by clicks. You would charge an advertiser, for example, $3.00 for every click you get for them.
Cost-per-action Total cost (ad spend) divided by actions/conversions/leads. For instance, you may charge an advertiser $50 for every lead you drive.

For publishers, CPM pricing is the safest and easiest way to sell. As long as you have a pulse on your monthly impression numbers, you can easily make commitments based on that data.

Cost-per-click (CPC) is a riskier model for publishers, since it introduces an unknown factor: click-through rates (CTRs). If you show an advertiser's ads and nobody clicks on them, you’ve “wasted” those impressions and make nothing.

Many large ad platforms such as Google’s and Facebook’s employ this, though, because it appeals to performance-focused advertisers.

Cost-per-action/lead (CPA or CPL) is less common, but loved by direct response advertisers. Here, advertisers pay only for a conversion event, such as a purchase or app download. This is even riskier for publishers, since you have to worry about both CTRs and conversion rates (CRs). If 100% of people click, but 0% of them convert, you make nothing.

As you look to determine how you should charge, keep the below questions in mind:

1. Who are your advertisers?

At a high-level, are your advertisers more focused on driving down-funnel results or for the brand awareness opportunity?

For branding advertisers, CPM pricing is generally more interesting because it aligns with their internal goals tied to reach metrics (# of unique people who saw the ad). Direct-response advertisers, on the other hand, often view impressions as a “vanity metric” and prefer CPC or CPA pricing.

On top of that, are your advertisers sophisticated marketers? If you’re a peer-to-peer marketplace with sponsored listings, for instance, your advertisers may not know anything about CPM or CPC, so you should just pick the model that you think is easiest to explain.

2. What are your competitors doing?

If your advertisers are using multiple ad platforms, they will judge you against them. If they are advanced marketers also buying on Facebook, Google, Criteo and so on, they may expect you to sell via CPC too.

3. How much risk and complexity do you want?

As mentioned above, CPM is the safest for publishers because you don’t have to worry about CTRs or CRs. If you know your impressions numbers, you can accurately forecast revenue without the uncertainty of whether your users will interact with the ads.

If you are just starting your ad program, especially if it’s with beta advertisers, CPM pricing helps you monetize while you learn more about expected engagement rates. Over time, expanding to CPC or CPA enables you to expand your audience base.

As a final note here: you aren’t limited to just one pricing model. LinkedIn and others, for example, let you choose your pricing model (CPC, CPA, CPM).

LinkedIn Pricing Example

LinkedIn Pricing Offerings

Determine your sales model

Decide how you want advertisers to interface with you. There are three main paths here:

  1. Direct relationships using manual contracts and insertion orders. You would work directly with your advertisers, and they purchase through you (CC payment, invoicing, etc.). Your ad operations team would manually set up and monitor campaigns. The advertiser would come to you for reporting.
  2. Direct relationships, served through programmatic channels. Your advertisers would buy from you through a demand-side platform (DSP) via Programmatic Guaranteed (PG) buys or Private Marketplaces (PMPs). The ad exchange you work with would handle the payments, but you would still have a direct relationship with the advertiser for pricing, targeting, etc. For reporting, the advertiser could track that within their DSP dashboard.
  3. Self-serve ad portals. Here, advertisers could opt into your ad program and manage campaigns without interfacing with a sales or ad operation team. Generally there will be credit card pricing within the portal. Just because you have self-serve, though, doesn’t mean you won’t need a sales team to proactively chase down advertisers.

Chairish self-serve

Most new ad platforms will focus on #1, especially for their beta program. #3 makes sense in order to scale, or if you’re a marketplace, where it’s relatively easy to add an opt-in option within your vendor portal.

Generally PMP and PG integrations are for late-stage ad platforms working with top-tier advertisers who would prefer buying all ad inventory through their DSP.

Determine your commitments / ad delivery model

Another detail to contemplate is what type of commitment (or, volume guarantees) you want to make with advertisers. This goes hand in hand with the ad delivery logic you use.

This boils down to three high-level categories:

  1. Guaranteed volume with fixed ad rates. This is your quintessential “rate card.” You may work with an advertiser to promise, say, 10 million impressions over the course of a month, with a fixed cost of $5 CPMs (you would make $50K).

    The ad delivery logic here would ensure that this campaign hit that volume goal over the time frame, even if other advertisers are willing to pay more for those impressions. It’s not the best way to maximize revenue, but it’s an intuitive way to sell and buy.
  2. Variable volume with auction pricing. Or, you can set expectations with advertisers that what they are willing to bid impacts their volume. In this model, you would use auction pricing logic that would select the ad that has the highest expected CPM for you.

    As an example, you could sign a contract with five advertisers and let them choose their CPMs. If they are all vying for the same impression, the advertiser who bids the most would win (until they hit any budget caps, at least). If the other four advertisers would like more volume, they would have to work with you to increase bids. (For additional complexity, you’ll want to debate between first and second price auctions.)
  3. Variable volume with everyone at the same fixed rate. The least common of the three, this generally applies to simple or beta ad programs that (1) don’t want to guarantee volume, (2) have the same pricing for everyone, and (3) are using ad delivery logic that rotates the ads evenly.

    For example, Chairish offers a simple, self-serve way for their sellers to opt into their sponsored listings ad program. Once a merchant joins the program, their ad rotates evenly with all the other promoted listings (and everybody pays the same CPM behind the scenes). The volume here is variable, though, in the sense it will fluctuate based on website and search volume. Chairish is making no guarantees that the seller will see any amount of volume over a specific time frame.

Rate card example

Rate card example

In regards to whether it makes sense to have auction pricing or fixed rates, some considerations are:

  1. Auction pricing is better suited for performance-minded advertisers, not branding ones. Sophisticated brand marketers like volume commitments because it helps them allocate their budgets with confidence.
  2. Auction pricing lets the market determine the value of your ads. Let’s say you have arbitrarily been pricing ads at $10 CPMs. When moving to auction, however, you find that advertisers, if given the opportunity, will pay $20+ for certain targeting permutations. (On the flip side, potentially they would bid less.)
  3. Auction pricing works best when you have a self-serve ad portal. If an advertiser wants more volume, they will need to contact you to increase bids. En masse, this could lead to an overworked ad operations team. But if they had a portal where they could monitor and change bids themselves, you could more easily scale the platform.
  4. Auction pricing gets complex if you price on CPC/CPA. This is because, to maximize your revenue, the winning bid shouldn’t necessarily be the advertiser with the highest CPC; it should be the one with the highest eCPM (expected cost-per-mille), which includes the expected CTR based on past data.

For example:

CPC Bid Expected CTR Expected clicks (per 1K impressions) Your expected ad revenue (or, eCPM)
Ad #1 $3 2% 20 $60
Ad #2 $2 4% 40 $80
Ad #3 $1 6% 60 $60

In this hypothetical, Ad #2 should win the auction since, while the bid is technically lower than Ad #1, you make the most revenue by displaying #2. To succeed at auction pricing, your ad decision engine needs such logic built in.

In summary, if you’re just launching your ad platform and don’t have self-serve, the easiest path is to work with beta advertisers and sell via fixed rates (whether variable or guaranteed volumes). As you scale the ad business, you can incorporate CPC auction pricing to maximize your revenue.

Keep in mind--you don’t need to price everything the same. You could have full site takeovers that are guaranteed volume at fixed rates, but then have remnant inventory that you sell via CPC auction pricing.

Determine your ad rates

Let’s say you don’t have auction pricing or self-serve and are determining your fixed rates. Deciding this is tricky since you don’t want to undervalue ads or price them too high. For this reason we recommend being flexible with pricing and iterate over time.

As you ideeat your rate card, think about the below questions:

  1. What are your operating costs? While it may take time for your ad platform to be profitable, you need to understand your unit economics. Does your sales/support/server costs outweigh what you’re charging advertisers? If so, scaling could be disastrous to your bottom line.
  2. What are others charging? Try to understand what competitors are charging for their ad placements. If you price higher than them, your advertisers will force you to justify why.
  3. What is the value of your audience? This will be subjective, but ask yourself how unique your audience is and/or if you offer any targeting options that are not available elsewhere. If you feel you have an audience that justify premiums, charge accordingly and make this value clear to advertisers.
  4. What performance are you driving? If you’re driving results cost-effectively for advertisers (clicks, purchases, leads, etc.), you have room to charge more. If advertisers are complaining that their spend has no down-funnel results, however, you’ll need to either lower your rates or rethink your ad platform’s set-up (different ad units, targeting options, and so on).
  5. What ad units are you offering? Advertisers will pay premiums for engaging ad experiences, such as native ads, full site takeovers, and sponsored listings. Such rates may be less interesting if you’re pitching just rectangular banner ads.
  6. How granular do you want your rate card to be? This will mainly come down to what targeting options you offer. We advise having different and higher rates the more targeted the advertiser wants to go, such as:
Ad unit / targeting CPM
Banner ad appearing everywhere (also called run-of-site or run-of-network) $2
ROS banner with country targeting $3
A native ad unit targeting your "food lovers" persona, built using your first-party data $10
Full-site takeover in a specific country, targeting a specific persona $30

Determining your ad rates is a mixture of game theory and trial and error. If you have no idea where to start, pick a number that’s around the industry averages (see below) and work from there. Starting with lower rates is advised, as you can always increase them as you learn more, and early on, advertiser adoption is more important than profitability.

You’ll know you should increase your rates when:

  1. Your advertisers gush about how well your ad platform is performing
  2. Your advertisers want to spend more
  3. You have more demand (advertisers) than supply (available impressions)

Average industry rates

These are industry benchmarks for what eCPMs advertisers are paying. These shouldn’t be prescriptive, but are directionally accurate to help understand where to start.

Industry / Ad Unit Average eCPMs
Retail Media $5 - $20
B2B or B2C Marketplace - Sponsored Listings $5-$15; niche $50+
P2P Marketplace - Sponsored Listings $2-$5
Social Network - Native Ads Most: $2-$8; niche: $20+
Traditional Publishers - Direct Sold $5-$15; full site takeovers:$30+
Non-Traditional Publishers - Direct Sold $5-$15; niche audience:$30+
DOOH Ads $6-$12
Email ads $8 - $12; niche newsletter sponsorships: $100+
Podcast Ads $8-$25, depending on audio length

Based on your use case and industry, picking a number within these ranges is a good place to start.

If you’re looking at CPC pricing, you have an even tougher decision, as what you charge will need to factor in expected click-through rates. If CTRs are low, you will need to charge higher CPCs to justify the impression.

For frame of reference, below are the average CPCs advertisers pay on the major ad platforms.

Publisher Average CPCs
LinkedIn $5.60
Google $2.30
Facebook $1.70
Amazon $0.90
Twitter $0.60

Conclusion

How you sell your ads — and at what price points — will have a huge impact on the success of your ad business. Price too low, and you leave money on the table. Price too high, and advertisers won’t want to work with you.

The good news: it’s your ad platform. You make the rules.

You can always adapt your pricing model and price points based on advertiser feedback. We recommend working with your beta advertisers to figure out a good starting price, then making adjustments as you get more demand and roll out new features.

About Kevel

Kevel offers the infrastructure APIs needed to quickly build custom ad platforms for sponsored listings, internal promotions, native ads, and more - so you can drive new revenue and take back the Internet.

We are committed to the vision that every online retailer and publisher should be able to add user-first ad revenue streams and take back the Internet from Google, Amazon, and Facebook. Customers like Ticketmaster, Yelp, Strava, Mozilla, and many more have already launched successful ad platforms on Kevel.

Chris Shuptrine
Chris Shuptrine

Chris has worked in ad tech for over fourteen years in a variety of roles - giving him customer support, PM, and marketing perspectives from both the advertiser and publisher sides. He's the VP of Marketing at Kevel.