According to Ed Papazian, president of Media Dynamics, a consulting/publishing company, the average online video ad was double the price of a national TV commercial in 2013. He estimates that last year, an average online video ad was priced at $20 to $23 for the cost per thousand viewers (CPM). In comparison, a 30-second television commercial had a $9 to $10 CPM.

The top price for video advertising, says Papazian, comes with “targeted video” online that has an average CPM of $32.75. Untargeted video buys, on the other hand, are much more comparable to TV spots, with a CPM of around $9.

So why the disparity then, between online video and traditional television advertising? Below, we’ll discuss three reasons why we believe online video merits its hefty price tag.

1. Highly sought-after target markets are moving online

An increasing number of young Americans are cutting the cord, opting out of pay TV services. A new study from Experian Marketing Services found that 12.4% of households where an adult under the age of 35 lives are cord-cutters. That number jumps to 24.3% when you factor in young adult households with either a Netflix or Hulu account. Similarly, YuMe and IPG Media Lab noted in a report that the decline of TV usage is highest among millennials.

Younger consumers are moving away from traditional television viewing and shifting their focus to online content. comScore’s “Digital Future in Focus” report notes that 85 million daily viewers are consuming online video, with millennials spending 48% more time with online video than the average viewer. Video ads account for 5.7% of total viewing time.

“Young people and Millennials are increasingly difficult to reach via traditional media, but they are the most engaged viewers of online video…,” claims comScore.

Not only are millennials the most engaged viewers, but they are also the heaviest viewers of all types of video content. (YuMe)

Millennials video viewing

According to Barkley, the 80 million U.S. millennials (born between 1977 and 1995) represent 25% of the country’s population and $200 billion in annual spending power.

To truly reach these valued customers through their preferred media channels, brands are going to have to invest in targeted video advertising which comes at a higher price—a price that is further justified by the points below.

2. Online video ads are more effective than TV commercials

In terms of Nielsen effectiveness metrics (general recall, brand recall, message recall and ad likeability), online video ads have a higher impact than TV ads.

Video Ad Effectiveness Graph

As displayed in the graph above, short form video ads (up to 24 minutes) and video ads in full episode players outperform their TV counterparts. Additionally, viewers are receptive to video ads, choosing to watch them for an average of 20 seconds with an 87% completion rate. To see a breakdown of the results, feel free to check out the complete study from IAB.

Not only do viewers find online video ads more effective, but a majority of ad executives (75% of respondents from a BrightRoll study) believe that they are equally or more effective than television ads at reaching audiences.

Comparative effectiveness graph

3. Online video ads see higher engagement

In a comment responding to the MediaPost article about how online ads out-price TV spots, Justin Farrell from Conversant Media, formerly ValueClick Media, noted that when it comes to television ads, we have to take “into account how many people are changing the channel during commercials, leaving the room during commercials, DVR’ing and fast forwarding through commercials, using their tablet’s during commercials, muting the TV during commercials.”

Engagement with TV spots isn’t an easy thing to measure, especially when you consider all of the ways we distract ourselves while watching traditional television. A May 2011 report from YuMe and IPG Media Lab found that people tend to be far less distracted from online video ads than TV commercials. To compare, 27.1% of respondents noted that nothing distracts them while they watch video online, while only 6% of TV viewers said the same.

Distractions from media

Additionally, the study found that people pay more attention to online video ads.

Ad attention graph

“A web user is less apt to turn his attention elsewhere for 15-30 seconds, than is a TV viewer, who knows to expect 3 minutes or more of ads at a time,” stated another commenter on the MediaPost article, Steve Burris, perfectly summing up the issue.

Furthermore, a majority of marketing professionals (58%) thought that video ads performed better than TV ads in terms of achieving engagement goals. Only 15% said engagement was worse for digital video ads.

Video engagement chart

We understand that there are many other elements that factor into designating channels for marketing campaigns. However, if you consider these statistics at their most basic level, it’s easy to understand the cost disparity between online video ads and television spots.