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Pricing Online Advertising: CPM vs. CPC vs. CPA

If you want to run advertising on your site, understand these three acronyms.

  • Cost Per Mille (CPM) is when an advertiser will pay you a flat rate based on the number of thousands of times the advertisement is shown. The M stands for Mille, which is thousand in Latin, and, thankfully, doesn’t stand for million. 🙂
  • Cost Per Click (CPC) is as it sounds, you are paid per click on the advertisement.
  • Cost Per Action (CPA) is when you are paid when the user performs the action. CPC is a type of CPA, where the action is a click. Generally speaking, the action is something more than a click and can be anything from submitting your ZIP code to applying for a credit card or mortgage loan. An action can be anything trackable.

The Math Behind Advertising/User Acquisition

Before talking about the differences between CPM, CPC, and CPA and which is best for you, we should discuss the math behind what these advertisers are trying to achieve.

A smart company knows the lifetime value (LTV) of a new customer and uses it to drive its customer acquisition strategy. If you know that every new customer is worth $100 then you can afford to spend up to $100 to acquire each new customer. You may want to pay something less than that, to maintain a profit margin, but you know you can afford to spend up to $100 (minus overhead) because each customer will eventually, on average, generate $100 of revenue for your business. (in reality, it’s a little more complicated given time value of money and other factors but this basic idea still applies)

So how do you go about acquiring customers? One method is through advertising. You know that your banner ad will get clicked on a certain percentage of the time it’s displayed. Let’s say 5%. Of those 5%, 20% will eventually become users. That means for every thousand times you display the ad, 50 will click on it and 10 will become users. If each customer’s LTV is $100, you could afford to pay $1000 to get those ten customers.

You have three options on how you want to pay the publishers – pay per thousand impressions, pay per click, or pay per action (becoming a customer). With CPM, the risk is on the advertiser (so is the control, since they control the banner and the landing pages). This is why most major premium publications with huge traffic numbers only ever go with CPM. The publisher gets paid regardless of how good the banner is or how well the landing pages convert. With CPC, the risk starts shifting to the publisher since the publisher is paid only on clicks but doesn’t have any input on the banner being clicked. With CPA, the risk is entirely on the publisher now he or she can’t do anything about banners or the landing page. In fact, if the advertiser has some way of capturing customers so they can market to them later, those might not be commissionable actions!

With risk comes reward. If I know a new customer is worth $100, I’m willing to hand someone $99 for that new customer. I’m only paying if I get a customer. If I’m paying for clicks or for impressions, I don’t know what the click through rate (CTR) will be. I don’t know what the conversion rates will be. I may know how the banner performs or how the landing pages perform on sites similar to the publisher… but I don’t know for certain. For that reason, I need a greater cushion. If I’m willing to pay $50 per customer on a CPA deal, I might only pay $10 on CPM.

What About Branding?

Sometimes an advertiser wants to get their name out there or appear to be supportive of the little guy (you). All of that math goes out the window when a company is doing it for “branding” reasons. Sometimes a company has no idea what the LTV of a new customer is. Sometimes it’s a startup with no revenue strategy and no way to generate revenue. Sometimes it’s a huge household brand name that generates billions in revenue and just wants to spend a little bit of that cash to spread some good vibes. In those cases, there isn’t a rigid math-based acquisition strategy. They just want to see their name in the lights and they’re willing to pay you for it. In those cases, you can throw everything I said earlier out the window.

Now that we understand the mentality of the advertiser, let’s figure out how to use this to your advantage.

Which is better?

I’ve always preferred CPA for two reasons. First, I wanted to be compensated based on performance. If I am able to send you credit card approvals, pay me for credit card approvals. If I send you stock market investors, pay me for them. If I send you window shoppers, don’t pay me. When I send you a lot of them, and you’re able to determine the quality of those leads, I will negotiate better rates. I’ll take the risk, just pay me for it.

The second reason is that I never used display ads. My feeling is that display ads are like billboards – they’re are good for branding but terrible for converting. Every affiliate link I had was integrated into a post either as a link to the product or a branded image like the company’s logo, card art, or an application button. I did CPA because I could control how I was introducing the advertising.

That said, I’ve tried display ads before based on both CPM and CPC. I’d tried the display networks before and I always had trouble with fill rate (the % of the time the advertisement was showing a paying advertiser, rather than a house ad). For CPC, it was almost exclusively Google Adsense. In the end CPA was always the most lucrative and you always have to go with what pays you the best.

Which One Is For You

For your site, it’s important to understand how CPM, CPC, and CPA all work but it will come down to your blog and your prospective advertisers. If you’re not in a niche that lends itself to a lot of easy CPA type of opportunities, CPM and CPC are your only options. If you do have a lot of CPA offers, I recommend going there if you have very targeted traffic.

My blog had great traffic for credit card terms and I wasn’t going to sell access to them at the same price as a random visitor to CNN Money or Kiplinger. My experience is not going to dictate what’s best for you, even if you are in the personal finance niche, and you need to test it out yourself.

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Jim

In 2005, I founded a personal finance blog (Bargaineering.com) that became successful enough that I quit my career as a software developer in the defense industry. It is my goal to share everything I learned so that you can do the same - build an online business that let's you pursue your passion.

9 responses to “Pricing Online Advertising: CPM vs. CPC vs. CPA”

  1. Nice summary Jim! I also prefer CPA since I get the most payout from that. I don’t have enough views to generate anything meaningful from a CPM or CPC model.

  2. Joe says:

    I like them all. CPA has been the best performing lately, but I have CPM and CPC too.
    The CPA is good, but it’s just one company driving the payout. I’m afraid what will happen when that company runs out of advertising dollars.

    • Jim says:

      There are more companies in the CPA world than in the CPM world too, especially for non-premium brands (ie. not yahoo.com or msn.com or high pageview sites).

  3. Miranda says:

    As someone who should learn more about this stuff, this was a helpful post. Thanks! So far, I don’t really have to implement, but our buddy Tom would probably be happy if I “got” this stuff and tried a little harder to convert…

  4. Pat: SSB says:

    Very good explanation on a topic of which I know pretty much zero.

    I’m curious though how you actually signed up CPA accounts in the first place.

    • Jim says:

      The quick answer is try affiliate companies. Big ones like Commission Junction, Linkshare, and Shareasale are a good place to start. I’ll earmark this for a longer post in the future!

  5. Forest Parks says:

    Interesting summary Jim and certainly food for thought. I’m starting a new site that will be related to building blogs and think that CPA will certainly be the best monetization method for that.

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