Tuesday, January 03, 2012

Cost of Advertising: CPM, CPC and eCPM Demystified

The purpose of this post is to clarify the terms CPM and CPC and also show how to convert from one model to the other.

CPM

CPM stands for Cost per 1000 Impressions (number of times the ad is shown) (M is Roman numeral for 1000). Generally display advertising (e.g. banners) is sold in CPM. If the ad is shown 1000 times the cost will be equal to 1 CPM price. For example, if a publisher charges $10 CPM, that means your ad will be shown 1000 times for $10. If your budget is say $10,000 then mean your ad will be shown 1,000,000 times ($10,000 *(1000/$10) ).

Total Impressions = (Total Cost or Budget) * (1000/CPM)

If you are trying to find out how much you will pay for a given number of impressions then you can use the following formula

Total Cost = (Total Impressions * CPM)/1000

If you notice in the above calculations, there are no mentions of how many people the ad will be shown to or how many clicks will be generated. CPM advertising is solely based on impressions. In theory if you don’t set a frequency cap (i.e. the maximum number of times one person will see your ad) then you could end up serving all the impression to one person only. (If you would like to know more about frequency cap then drop me a line and we can talk further).

CPC

CPC stands for Cost Per Click. Google Adwords made this model popular. Generally search and text advertising is sold by CPC model. In this kind of advertising model you just pay for number of clicks you get on your ads irrespective of number of impressions it takes to generate those clicks. For example, if the CPC is $1.00 and your ad is shown 12,000 times but gets no clicks then you pay nothing. If you get 10 clicks on your ad then you pay $1.00X10 = $10.00.

CPC = Total Cost/Total Clicks

Total Cost = CPC * Total Clicks

Comparing CPM to CPC and vice versa

The goal of advertising using one model versus the other is really dependent on what you are trying to achieve. If your objective is to generate Brand awareness then you might engage in display advertising which will most likely be sold in CPM model. While search ads on Google or text or display advertising on Google Ad Network are sold in CPC model.

Often you will end up comparing two models to figure out where and how to spend your money effectively. To do direct cost comparison you will need to convert CPM to CPC or CPC to CPM pricing.

CPM to CPC conversion

Below is a formula that you can use to calculate a CPC equivalent of a CPM model

CPC = ((Total Impression *CPM)/(1000 *Clicks)

Below is a spreadsheet to show you the same calculation. Let’s take an example of a campaign that costs you $10 CPM and generates 50 clicks in 50,000 impressions.




Formula
CPM
$10
Know value
Impressions
50,000
Know value
Click
100
Expected or Known
Total Cost
$500
Impressions * (CPM/1000)
Cost Per Click
$5
Total Cost/Clicks

The above $10 CPM campaign is equivalent to a $5 CPC campaign.

CPC to CPM conversion

Below is a formula that you can use to calculate a CPM equivalent of a CPC model

CPM = (CPC*clicks*1000)/Total Impressions

Let’s take an example of a campaign that costs $4 per click and generates 100 clicks, resulting in a total spend of $400. Let’s say it took 50,000 impressions to generate those 100 clicks.





Formula
CPC
$4
Known value
Clicks
100
Know values
Total Cost
$400
CPC*Clicks
Impressions
50,000
Impressions * CPM/1000
Cost per 1000 Impressions
8
Total Cost/(Total Impressions/1000)
CPM
$8
Cost per 1000 Impressions


eCPM

The CPM value you get when you convert CPC into CPM is also known as eCPM (effective CPM).

Note: eCPM is also shown in Adsense reports, in that case it is

Total Adsense Revenue /(Impressions/1000)

I have developed few calculators to calculate CPM and CPC, feel free to use them.

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