• by Rich Routman , Op-Ed Contributor, September 13, 2012

Video, like all other forms of online advertising, changes rapidly. While viewers are consuming more than 36 billion videos a month and significantly growing the market’s available supply, we have not yet reached a buy-side evaluation standard.

Should advertisers stick to the traditional and now standard cost-per-thousand (CPM) pricing model? Or should they try a different approach, one that replicates TV or even takes advantage of the inherent “lean-forward” features of online video?

CPM remains the dominant pricing structure in digital video, as it is in display. Buying on a CPM basis is designed to deliver reach, similar to the way advertisers buy GRPs on TV (we will avoid the larger online GRP debate for the time being). CPM prices vary according to content, player size, publisher and market demand. If advertisers want premium content on a publisher like Hulu, it is more than likely they are paying more for the same video inventory reaching a smaller audience than if they had been purchased the program ads on TV.

An alternative model designed to replicate TV buying more closely is cost-per-completed-view (ad-view) or CPCV. While this is not necessarily a new model, with the emergence of DVRs, this could be a clear way to link the cost of delivery through each pertinent, or best available, consumption platform. While it might be impossible to change TV pricing, CPCV is equally as powerful online because consumers can avoid ads by either closing a window or surfing to another site. A study earlier this year found that industry-wide completion rates ranged from 88% for long-form content to 54% for shorter videos. Given those numbers, advertisers are compensating the publishers for a significant amount of waste. Clearly, the ad community wants to be as close to 100% completion for the rates they pay, which is another reason why CPCV has successfully taken control of dollars in the market.

While platforms such as Hulu have experimented with the adoption of CPCV pricing, the model works for other content and publishers as well. Professional sports leagues that either stream live games or package highlights on their websites are likely to garner high numbers of completed views because their content mirrors the “TiVo-proof” live broadcasts on traditional TV. CPCV also makes particular sense for advertisers distributing branded content, as it means they only pay when their branded message is experienced in full, functioning more along the lines of a time buy packaged with a rating or audience guarantee.

Another pricing option is cost-per-engagement, or CPE, which is gaining momentum as advertisers enable consumers to interact with their video ads. CPE pricing allows buyers to pay for an ad impression only if the user “engages” with the ad unit. The tricky part is defining what actually qualifies as engagement -- it may include mousing over, clicking on the interactive video ad unit, or establishing a presence on a certain portion of the page for a defined period of time.

CPE is heavily reliant on two factors: targeting technology and creative. CPE sales put an enormous burden on targeting because it is crucial to match a message to an audience that is likely to interact. Once that targeting is completed, it is up to the ad creative to truly entice the viewer.

That being said, CPM remains the main tactic for buying reach and scale, so while the price varies depending on the seller and the level of content, this structure is typically more cost-effective than the others. Conversely, advertisers buying on a CPCV and CPE basis are buying with the explicit understanding that someone is actually seeing their ad and are hopefully more likely to remember the brand, so they are going to be paying more.

Similar to display, the online video market may never agree on one single pricing model. As long as we get both sides to understand the differences between the standard pricing models, advertisers will be ensured high impact and scalable message delivery while mitigating wasted spend.