Charging CPM vs CPC

Charging CPM vs CPC

To start with, let's clearly define what I mean by CPM and CPC.  These are both usage based pricing models, as opposed to subscription.  This means the more you deliver on the pricing trigger, the more revenue you will make.  It also means the customer has a lot less risk of paying for value they may not receive.  This doesn't mean the value is a sure thing though, as sometimes usage models can fail.  For example, lets say someone was paying cost per lead, but a group of digital trouble-makers decided to generate tons of fake leads.  The customer would be charged for these, though they should challenge these (I would!).  As for CPM and CPC, these are the two main mechanisms used for charging for digital advertising (display) products and services.

CPM stands for cost per mille, which is an ancient way of simply saying cost per 1000.  In the display world, it is used to charge for every 1000 impressions.  An impression is simply when advertising is shown.  So if something is $5 CPM, and a banner ad is displayed 10,000 times, they would be charged 10,000 / 1,000 * $5 = £50.

CPC stands for cost per click.  You may know this better as PPC (pay per click) which is what Google and many others call it.  As you would have guessed, this charge kicks in only when a user clicks on an impression.  So in the example above, if an impression is served 10,000 times, but no-one clicks on it, they wouldn't be charged anything in a CPC model.  

We then need to deal with another acronym (the display world LOVES acronyms!).  CTR is the click-thru-rate.  It is simply the number of clicks divided by the number of impressions.  So if there has been 1000 impressions and 50 clicks, then that would be a 5% CTR.  It's worth noting that anything above a 5% CTR is generally considered very good.  It is not unusual for some advertising campaigns to get less than 1% CTR.

So, how do you know which method you should use?  As with most things, it depends.  Your customers will likely want to do whatever benefits them the most, but that doesn't mean it is best for you.  Let's go through each method in more detail to try to dig into this more.

I always think of CPM as the best way to capture value for brand.  The example I tend to use here is diapers.  Think of all of the diaper ads people see before they're at a point when they need to actually purchase a diaper.  Did they ever go to the diaper companies website or click on any diaper based ad?  Probably not.  Has the diaper brand been stored in their memory somewhere for brand recognition later?  Probably yes.  For brand campaigns, the value is in someone seeing the impression.  Clearly, customers will want someone to click on it, but that is kind of up to them.  What do I mean?  Let's say someone has a horrible ad campaign.  It might never get clicked on no matter how much you show it.  Does that mean you aren't delivering value to the customer?  No.  This is largely their issue (unless you are serving it to the wrong audience knowingly).

As for CPC, I find this lends itself more towards products and services as opposed to brand.  Think of a company like Amazon.  When you are shopping and it suggests other sponsored products, the focus is usually on the product itself more than the brand.  If you saw 5 products at different points for diapers, you are less likely to recall the brands than if they were 5 brand advertisements.  As mentioned before, customers usually prefer CPC because they usually value a click much more than an impression.

You also need to consider the market context here.  Let's say you are a specialist site and your customers are shopping for phones.  An impression on your site is going to be worth more to someone selling phones than an impression on a generic site such as Facebook.  However, a click is a click for the most part, so a click from your site is likely to be considered roughly the same as a click from Facebook.  Going against giants like Facebook and Google might not be the right strategy, but could be.

Another dynamic at play here is if you are considering making a biddable model in relation to these.  With CPM, a biddable model is a breeze, as you just serve the impression with the highest bid, unless you have rules to limit the number of times a consumer sees the same ad for example.  With CPC, it becomes complicated very quickly.  If you have an Ad that is $3 CPC and one that is $2 CPC, which do you serve?  Well, it certainly isn't always the one that is $3.  What you have to do is calculate the eCPM (equivalent CPM).  You take the CPC * CTR and prioritize by that.  Why?  Because if the $2 CPC has twice the CTR (click-thru rate) of the $3 CPC, you will make more money serving the $2 one in a CPC model.  This can get complex quickly as an ultimate model would be able to look at specific users and their likelihood to click on each individual ad.

Do we have an answer now?  Maybe.  That is up to you.  You need to consider the above and evaluate each method accordingly.  You might even throw both of them out and go with a subscription model.  However, in the display world, CPM and CPC are the clear kings.