April 13, 2012

What are CPM, CPC, CTR, and CPA?

These mysterious acronyms are measure units used in advertising planning and measurement.

Notes: All these acronyms and many more are grouped together in our Digital Marketing Dictionary that you can download here.

More people are thinking about online advertising. But they also wonder about efficiency and cost.

Against common knowledge, there are now very precise tools that measure the success of online advertising, whether on Google Adwords or Facebook Ad. Here is what you need to know:

CPM (Cost per Thousand)

The most basic tool is CPM, cost per thousand of impressions, or how much it costs to have an ad published a thousand times on the Internet, and seen by users. CPM is used by publishers to show their pricing to advertisers. It allows you to compare different offers.

  • CPM = the cost of showing your ad 1000 times

How to calculate the CPM? 

CPM = Total spending / Number of impressions

CPC (Cost per Click)

This is currently the most common tool; the product owner pays the website or host every time someone clicks on an advertisement banner.

The cost per click is defined according to keywords and success rate. A keyword is used for a search; its rate is assessed according to its success. For example, the keyword «real estate» will be more expensive than «opossum.»

  • CPC = what you pay to get a click on your ad

How to calculate the CPC?

CPC = Total spending / Number of clicks

CTR (Click through Rate)

When CPM and CPC indicate the cost of advertising, CTR measures its efficiency. The number of clicks can be skewed by the number of impressions: an ad that is published more times will have more chances of getting clicks. By dividing these numbers, one obtains an efficiency percentage that is more relevant to the ad: the number of clicks in relation to the number of impressions.

  • CTR = percentage of clicks per impression

How to calculate the CTR? 

CTR = (Total clicks / Number of impressions) x 100

CPA (Cost per Action)

The CPA indicates a cost, but differs from CPM and CPC because it is not a payment method online. It gives excellent information about the efficiency of an online ad. This is the price that is paid every time someone engages in a “conversion.” A conversion is an action that was considered useful by a user on your website, such as subscribing to a newsletter or buying a product. These conversions must be defined in the beginning of an ad campaign.

  • CPA = Cost to obtain a conversion

How to calculate the CPA?

CPA = Total spending / Number of conversions

The theoretical maximum for CPA should never go over the margin that you get when you sell a product. For example, if your margin on a camera is CHF50, your CPA should not be more than CHF50. If you go over your maximum CPA, you lose money with each conversion.
In order to optimize your CPA, you must have a Google Adwords campaign well organized, and Google Analytics statistics that are well programmed. The conversion goals must be clearly defined from the beginning.

This video shows how to create an efficient ad on Google Adwords, and how its success is measured with more sophisticated tools.

For Facebook Ad, the optimization of the CPA is more complex; it is created with special ad platforms, such as Alchemy Social, for which Enigma has a license.

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This article has been posted by Olivier Kennedy
on April 13, 2012
in #Other
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