What are CPM, CPC, CPA and CTR?
What is CPM?
CPM means “Cost Per Thousand.” It is the amount you are willing to pay to show an ad displayed at the top of a webpage to someone who has searched for something on the internet.
Cost per Mile, or CPM, is a pricing model used to calculate the cost of advertising on a website or blog. CPM is calculated by taking the ad’s cost divided by the ad’s number of impressions or views. For example, if an ad costs $5 and is viewed 1,000 times, the CPM would be $5.
Whether your ad is shown only once to each visitor (Unique Impressions) or any number of times – is something that you will have to work out with the nad-network or the website. CPM rates were once (pre yr 2000 bubble-burst era) as much as $75, but have now dropped to as little as $1 CPM.
What is CPC?
In online advertising, cost per click (CPC) is the most common way to measure the effectiveness and profitability of an ad campaign. It calculates how much it costs an advertiser to get one click on their ad. CPC can be used as a tool to compare the relative effectiveness of different advertising campaigns or even different ad placements on a single website.
The average CPC for all industries is $0.50, but can vary greatly depending on the industry. For example, the CPC for the technology industry is $1.00, while it is only $0.10 for the automotive industry.
There are a few factors that can affect CPC: the competitiveness of the keyword, the quality and relevance of the ad, and how well the landing page matches up with the user’s search query.
What is Cost Per Acquisition (CPA)?
CPA means “Cost Per Action.” The Action could be any of the following actions: A visitor clicking on your banner coming to your site and filling up a simple enquiry form (CPR – Cost Per Registration) , or if the visitor makes a purchase (CPS – Cost Per sale). It could be a flat fee or a percentage commission of the sale made. Affiliate-Networks like Commission Junction, LinkShare, and ClickBank have very good software systems in place to track all this and provide statistics to online merchants and publishers on their network of websites.
In another section, I have explained in detail what an affiliate network is. They basically allow publisher websites to sign up for free so they can start earning commissions on sales arising out of the traffic they send to online merchants.
The Affiliate Network tracks all this using their system and code merchants and publishers must place on their website. Publishers can mostly sign up for free In some cases, online Merchants are required to pay a one-time setup fee and possibly a monthly fee with commissions – eg. As in commission junction. A very popular site that is free to Merchants is the Clickbank network.
What is CTR?
CTR is Click Through Rate. This is the percentage rate at which people click on your ad banner. CTR is a metric used to measure the effectiveness of an online ad. It is calculated by dividing the number of clicks on an ad by the number of impressions it receives. The higher the CTR, the more effective the ad is.
If your banner ad is seen by 100 people but clicked by one person – then it’s CTR is 1% or .01. Similarly, if your ad banner is seen 100,000 times and in the same time period it is clicked 2000 times – then your banner CTR is 2% or .02 .
This is how we calculate CTR …
(Number of Clicks / Number of impressions) x 100
Example, for above case it would be –
(2000 / 100,000) x 100 = .02
CPM, CPC or CPA … which is best for my ad campaign?
Your choice will depend on various factors. Sometimes companies such as Pepsi would just like to enforce their brand and be seen across many websites, without any need for the user to click on their banners. This is a brand hammering strategy, and a CPM deal would be preferred.
Apart from the above mass branding effort, the decision to go for a CPC, CPM or CPA ad becomes a calculated decision when you have a product that you want to sell on your website.
Would you pay the publisher for only visitors he sends you? or pay him for every thousand ads he displays for you? Or would you pay him a commission on sales from visitors he sends you?
This is tricky. You may need to read the paragraphs below slowly or several times over to get the gist of what I am saying …
To help you decide, you should first run a pilot CPM campaign that will help you gauge results. Your CPM campaign and the number of clicks on your banner will let you know exactly what your CTR (Click through Rate) is for your banner.
Your CTR will help you decide your campaign type—CPM or CPC? If your CTR is high, you should go in for a CPM; if its low, you should go in for a CPC.
The reason for this is simple. If you have a low CTR, you would rather only pay for the low traffic that comes to your site. If your CTR is high , then you don’t mind paying CPM – because your cost will not escalate for more and more visitors that come to your site but will remain the same.
I will explain the above with a couple of examples –
Lets suppose a website that you want to advertise on charges a CPM of $5.00 and a CPC of 50 cents. And, you need to decide if you should go in for CPM or CPC.
Let’s suppose you first buy 1,000,000 impressions. This works out to $5000 ($5 per 1000 impressions x 1000)
Now lets suppose your CTR is not good and is 0.2 % (or 2 clicks per 1000 ads)
Now, you need to calculate the amount you will pay of you buy a CPC.
If your CTR is 0.2% and you display 1,000,000 ads, then this works out to .002 x 1,000,000 = 2000 clicks.
So essentially, you have paid $5000 for 2000 clicks or $2.50 per click!!
This means that I am better of buying on a CPC basis, because one click there costs me only 50cents! And if I go for CPC, then I will get 10,000 clicks for $5000 … which is 5 times more than the clicks i get in the CPM model (2000).
Lets assume that your banner ad turns out to be very good and gets a very good CTR of say 5%
Now you need to decide ..CPM or CPC.
Lets analyze as above –
I paid $5000 for 1,000,000 ads at 5% CTR
That means 5% x 1,000,000 ads were clicked on , which equals
= .05 (5%) x 1,000,000 = 50,000 clicks!
So for $5000 i got 50,000 clicks.
Now, if I had bought on a click basis, then at the CPC rate of (50cents) I will pay
50,000 x $0.50 amount for 50,000 clicks, which is $25,000 (5 times what I would pay with CPM, for the same traffic)
So, I am better of buying with a CPM system for this banner ad campaign
What about CPA?
This system is gaining popularity slowly. It seems to be the fairest system of all three methods, especially when selling a product or service. Both Google and Yahoo are leaning towards changing their CPC system into a more fair and measurable CPA system. Google has recently launched Google Analytics and Google’s version of PayPal (Google Checkout) – which is a positive and firm step toward its CPA plans.
Selling ad space on your website – how much can you charge?
Nowadays, CPM rates have fallen from highs of $50 to $10 to $2 in many cases. If you have high traffic, you may approach ad networks, and they will serve out the ads for your website. They will give you a piece of code to insert into the pages of your website. You will get a username and password to log in to a control panel area on the ad-networks main website to see how your site is performing.
Ad networks pay you based on CPM or CPC, depending on what their client (the advertiser) opts for. They will take from 40% to 60% commission. This is acceptable because they get you the clients and revenues and have to manage all the advertising technology and payment systems.
Most of these ad networks require that you have a certain number of impressions per month to qualify to become part of their network of websites. For example, DoubleClick requires a minimum 5 million monthly page impressions.
There are many mid-sized networks, like Advertising, Fast Click, ValueClick (only CPC, owned partially by DoubleClick) and even smaller ad networks like, burstnet . Check out the list and brief on popular ad networks.
Banner Management Software
If you would like to manage your own Clients and their banner ads for your website, you will need to develop an ad-serving engine or license a third-party engine and install it on your website. You can get a list of free and paid software scripts that you can install on your website from cgi-resources.com or hotscripts.com