The advertising industry has evolved with its measurability and accountability over the years. For the case of mobile advertising, two pricing models are widely used to inform budgeting decisions, namely cost-per-mille (CPM) and cost-per-click (CPC). For app developers, mobile is a vital advertising channel, but each deployment has a cost governed by either of these pricing models.
In this blog, we shall delve into CPM and its application in ad spend efficiency as mobile marketers optimise campaign performance or choose rates that align with their goals.
What Is the Meaning of CPM?
The average CPM of advertising on social media was $4.33 in the second quarter of 2020. For better context, this is the average amount advertisers paid to have their ads viewed by a thousand potential customers.
Also known as cost-per-mille (where the “M” symbolises the roman numeral for 1,000), CPM is simply a pricing model that represents payment for 1000 impressions. This means mobile advertisers pay a fixed amount to a publisher for a thousand impressions of their ad. In practice, this means that the advertiser is charged every time their ad is shown on a publisher’s app or website, whether people see the ad or not.
How CPM Typically Works
As we have already established, CPM depicts the cost of a mobile advert per 1,000 impressions. Whenever an ad is displayed on a mobile app or web page, it is usually termed as an impression.
Traditionally, CPM has its roots in auction systems where it was used to indicate how much an ad would cost for every thousand people it was exposed to. For instance, if a CPM price was set to $5, the advertiser was required to pay $5 for every thousand impressions of their ad.
In current systems, advertisers are required to pay the publisher for every click on the ad, whether that advert is a display or text. So, when employing a CPM model, advertisers usually set the ‘CPM ads value’ to indicate to Google how much they are willing to pay for a thousand impressions.
Overall, with the CPM model, targeting and volume decisions are made mainly by the advertiser. Thus, making pricing decisions more centralised.
For example, an advertiser can start bidding CPC on Twitter until they find an ad combo that gets over 1% click-through rate (CTR), then switch to CPM. Though the average CPC on Twitter is in the $6–9 range, if one finds an ad that offers 1% or higher CTRs, then the effective CPC can go down into the $4 range by bidding CPM. Generally, the risk is higher for a marketer with CPM, as they are paying even if the ad does not perform satisfactorily.
Characteristic of the CPM Pricing Model
- The rate at which money is spent in a CPM model depends on the audience’s activity on the website, app, or social network.
- Generally, each ad impression is always recorded, regardless of whether the user clicks on or ignores it.
- Ad clicks are usually free.
- Ads are shown to the target audience, and advertisers can accurately segment the target audience by demographic, age, profession, behavioural factors, or input devices. This generally helps to narrow one’s audience reach and save on their advertising budget.
How to Calculate CPM
To calculate CPM views, the overall number of impressions is divided by 1000. Next, the campaign budget is divided by that number to derive the CPM.
CPM = (advertising cost / impressions generated) x 1,000
For instance: $100,000 (advertising cost) / 500,000 (estimated impressions/audience) = 0.002 x 1,000 = $20
Using this technique, one can easily determine what their budget should be and the impression number expected.
What Are eCPM and vCPM
vCPM, which stands for viewable cost per thousand impressions, is a variation of the CPM cost model, where the mobile advertiser gets charged only when their advert is displayed on a visible area of a publisher’s page or app. So, vCPM is essentially a metric employed to determine how many people actually see adverts on a mobile app or webpage. Since the value of single impressions vary depending on the payment model, vCPM accurately or effectively represents them.
On the other hand, some ad networks don’t pay publishers by impression, but instead use more in-depth performance metrics like effective cost per mille (eCPM) to measure the effectiveness of ad inventory, regardless of format. eCPM considers the actual number of clicks, number of impressions, and the total cost of a campaign. It’s calculated as:
eCPM = (CPC * # of Clicks) / (Impressions / 1,000)
Generally, eCPM is utilised by publishers to optimise ad placements, monitor monetisation campaigns, and assess overall ad monetisation performance.
What Is the Difference Between CPC and CPM
With the CPM model, advertisers pay the publisher when a visitor is given an opportunity to view the advert, i.e., an impression. On the other hand, with the CPC model, the advertiser pays the publisher only for click-throughs (when a visitor clicks on an advert).
For better context, let’s use an example of Facebook. With Facebook, CPC is used when one’s objective is to drive traffic to their website or get users to click on their Ad. Consequently, Facebook then optimises the Ad to serve those who are more likely to click and engage with the Ad.
On the end of the spectrum, CPM is employed when one’s objective is brand awareness and engagement. When an advertiser intends to create noise and inform people about their products or services without necessarily asking them to take a certain action, CPM comes into play. In such an instance, Facebook will show their Ad to as many people as possible in contrast to CPC, where it will only be shown to people likely to click and take action.
Furthermore, it’s important to note that CPM bidding will often grant more impressions than CPC. So, if you are under a time crunch for traffic, CPM is the better option.
Why Choose the CPM Model for Mobile Advertising?
Mobile advertisers typically take a CPM route for different reasons, such as:
- If they are running a branding campaign where the focus is to have people see their ad rather than interacting with it. For such advertisers, a high CPM is utilised to buy premium inventory.
- When the advertiser wants the cheapest possible inventory, and seeks to negotiate a cheaper CPM deal than any sort of performance-based deal.
- Because a good CPM deal offers better performance than a CPC deal, especially if one has a large budget or is good at optimising their ads.
Generally, a CPM model is often a strategically right choice for young brands who need recognition and awareness, without spending their entire budget on that one area of their marketing strategy.
Remember that the main factors in selecting CPM are
- Branding campaigns
- High percentage of clicks expected
- Clear goals
- Harder to track ROI
Why CPM Is a Great Choice for Performance
If an advertiser buys ad space on a CPC basis, all they are getting is a particular number of clicks. Though this seems like a relatively good deal for an advertiser, it’s an even better deal for the app or website. This is primarily because a well-managed CPC campaign gets a plethora of clicks from very few ad impressions, which means that the website can utilise very little of its inventory while still getting paid.
Since this isn’t always ideal for an advertiser, as not all clicks are actually profitable since some people click on ads continuously while not actually buying anything. So, if these click-happy individuals click on an ad, then it’s not nearly as valuable to a mobile advertiser as an actual good customer.
From a mobile advertiser’s standpoint, CPM campaigns deliver the potential for unlimited performance if the advertiser especially asks for a frequency cap. This means that each user will only see an ad a limited number of times, which reduces the potential for too many non-actionable clicks from click-happy individuals, while also improving the branding value of the campaign.
Furthermore, in contrast to a CPC campaign, the campaign will not stop when it hits the designated number of clicks. So, suppose the advertiser or algorithm optimising a CPM campaign discovers a sweet spot for a set of ads. In that case, those ads can simply continue, potentially gaining many more clicks than a comparable CPC campaign that costs the same amount of money.
How Advertising Publishers Apply CPM
Fundamentally, most publishers aim to maximise CPM. Generally, the best publishers differentiate themselves from the crowd with a strong brand identity, a good reputation, and unquestionable journalistic integrity.
For mobile advertisers seeking to be associated with these types of publishers, their ‘media buy’ must be guaranteed as buying on a CPM remains the most effective mechanism for guaranteeing that one’s ad campaigns end up where they intend them.
All things considered, mobile advertising will continue to become an indispensable element of technology companies’ business models.
The CPM cost model is still highly relevant today despite the fact that we have shifted from a mass-market mentality to a hyper-segmentation mentality. The main reason is that many brands still need to be given broad exposure to maintain top-of-mind audience awareness and, ultimately, market share.
It’s important to remember to use a CPM cost model if one’s advertisement goal is to raise brand awareness or maximise brand reach. Additionally, for apps or sites where traffic is low, the investment in CPM will most likely not have an excellent return on investment. On the other hand, for websites with high traffic, one’s ad could easily get lost on the page, so finding the sweet spot is always good when using CPM.