What is the Economics Behind Online Advertising ?

The market thrives because of demand and supply. As the demand rises, the price also rises; on the other hand if the supply is less, the price of the item or the product will fall, as the supply of product or service exceeds that of demand. The market generally works on this basic little funda. However, there are certain other external factors, which are also related to the fixing of the price of the item or the service available in the market.

The economics of online advertising also follow the same rule in most of the cases. Regarding television advertising, the timeslot and the general average viewing time of the viewers remain constant. However, since the supply is not constant, the price of advertising rises constantly.

Online Advertising with Fixed Target Audience

In case of online advertising, especially for finance, health and automobiles, constraint on the supply always remains, as the target audience is fixed. However, since there are specific sites where the concentration of the viewers can be relatively greater, the price of advertising oscillates. Since in such cases, both the relative space for advertising and the number of viewerships for these advertisements are not constant, it can be said that the CPM tends to become higher than the average online CPM. This leads the price of online advertising to rise sky-high at times. Along with this, the demand tends to increase with passing of time, pushing the price of the advertisements to rise further.

Constraints of Online World

One should definitely consider that the digital space is also bound and not completely open. Several constraints make it limited. The space and the viewership issues add to this point; thereby leading to scarcity. This scarcity leads to the increase in price of the advertisement revenue. Unless there is scarcity, the price for advertising would not have differed. It is the scarcity factor and the high demand that is really driving the price of advertising (on the online media) to rise enormously. In fact, it can be seen that both television, as well as the online media, run through the same advertising dynamics, as far as pricing for the advertising is concerned.

Scarcity of Advertisement Slots
On the other hand, the viewers also do not use these media for looking for advertisements. They come upon the advertisements while going through their favorite programs or articles (in television or internet, respectively). Therefore, the advertisers or the organizers cannot cut down the slot of the programs or the articles in order to make way for the advertisements (for generating more revenue). If this happens, there will be decline in the viewership in both the media. This again results in the scarcity of slots for advertising, in both the media, thereby making way for rise of the advertising rates.

However, it is seen that in the modern age, the digital advertising factor is gaining traction and is even blurring the costing of the advertisement based on positioning of the matter (as it did in terms of the print medium). The digital scarcity is also adding to the advantage of the advertisers in the way that the value chain will be benefited with the flow of more money into the medium. It is depicted that the average CPM of the validated impression will increase subsequently. This process will also help the publishers to get a fair value along with the advertisers.

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