Cost-per-click pricing for display advertising

Najafi-Asadolahi, S and Fridgeirsdottir, K (2014) Cost-per-click pricing for display advertising. Manufacturing and Service Operations Management, 16 (4). pp. 482-497. ISSN 1523-4614

Abstract

Display advertising is a $25 billion business with a promising upward revenue trend. In this paper, we consider an online display advertising setting in which a web publisher posts display ads on its website and charges based on the cost-per-click (CPC) pricing scheme while promising to deliver a certain number of clicks to the ads posted. The publisher is faced with uncertain demand for advertising slots and uncertain traffic to its website as well as uncertain click behavior of visitors. We formulate the problem as a novel queueing system, where the slots correspond to service channels with the service rate of each server inversely related to the number of active servers. We obtain the closed-form solution for the steady-state probabilities of the number of ads in the publisher's system. We determine the publisher's optimal price to charge per click and show that it can increase in the number of advertising slots and the number of promised clicks. We show that the common heuristic used by many web publishers to convert between the cost-per-click and cost-per-impression pricing schemes using the so-called click-through-rate can be misleading as it may incur web publishers substantial revenue loss. We provide an alternative explanation for the phenomenon observed by several publishers that the click-through-rate tends to drop when they switch from the cost-per-click to cost-per-impression pricing scheme.