How Web Advertising Works

Banner Ad Prices

A company buys advertising for one of two reasons:

  • Branding
  • Direct sales

­Branding refers to the process of impressing a company name or a product name onto society's collective brain. Let's say you have come up with a new brand of soda, or you are openi­ng a new restaurant, or you are selling a new widget. You want to get the product's name (and sometimes the product's features and benefits) firmly planted in people's heads. This is branding.


Branding happens with both new and existing products. When you see a billboard that says nothing but "Coke" on it, or you see a NASCAR car that says "Tide" on the hood, or you see a feel-good ad on TV about a car company or an oil company but there's no mention of a product, that is branding. The advertiser does not necessarily expect you to do anything today -- the advertiser simply wants to impress itself on your consciousness.

On the other hand, a direct sales ad is an ad that is trying to get you to do something today, right now, as you look at the ad. The advertiser wants you to:

  • Click on the ad
  • Call an 800 number
  • Drive immediately to the store

...or do some other active thing so that you buy something, download something or sign up for something today. The advertiser counts the direct responses to the ad and measures the effectiveness of the ad by those responses.

What branding advertisers came to feel about banner ads is that banner ads are not the most effective vehicle for branding. Relative to a magazine ad or a TV ad, banner ads are small and easily ignored.

What direct sales advertisers came to feel about banner ads is that the response rate for banner ads is low. For most banner ads, the industry average seems to hover between two and five clicks per 1,000 impressions of the ad. That is, if a banner ad appears on 1,000 Web pages, between two and five people will click on the ad to learn more.

Those five clicks per thousand impressions don't have much value to most advertisers. The reason is because those five clicks will not all generate sales. Out of 100 clicks, perhaps one person will actually do the desired thing (buy something, download something, etc.).

An Example

Here's an example. Let's say that a publisher wants people to buy a book, and hopes to increase sales of the book through advertising. The publisher has budgeted $3.00 per copy of the book to spend on advertising. If the publisher is paying $30 per 1,000 impressions for banner ads and purchases 100,000 impressions for $3,000, here is what happens:

  • The banner ad appears 100,000 times.
  • Let's say the response rate is five clicks per 1,000 impressions, so 500 people click on the ad during the time the 100,000 total impressions are running.
  • If two percent of those 500 people actually purchase the book, that results in 10 purchases.
  • The publisher had to pay ($3,000/10) $300 for each book purchased through that ad.

­Obviously, paying $300 to sell one book is not a good economic model for a publisher, especially since the budget is $3.00 per book. For this type of advertising to work for the publisher, the publisher would need to pay 30 cents per 1,000 impressions, rather than 30 dollars.

The Result

So banner ad rates began to decline. Today, if you shop around, you can buy banner ads from thousands of Web sites or brokers for 50 cents or so per thousand impressions -- which is pretty much exactly what they are worth to a person who is trying to sell something with banner ads using a direct sales model.

It is possible for some Web sites to charge more than 50 cents per 1,000 impressions. For example, the top 100 or so Web sites can charge a premium because of their size. There is also a process called targeting. For example, if you want to sell a GPS, you can advertise on the HowStuffWorks GPS article and get a targeted audience for your ad, which will typically increase the click-through and response rate for the ad. Yahoo and many search engines target their banner ads to the search words people type in, and they charge more for these targeted ads. But for most other Web sites, there is very little money to be made from banner ads.

In order to charge more than 50 cents per thousand impressions, Web sites have to offer ads that either:

  • Have a lot more branding power
  • Get a much higher click-through rate

Therefore, you find many different advertising formats and experiments on the Web today.