What is online advertising & What are CPM, CPC, CPI & CTR- Basics of online advertising

Online advertising, also called online marketing or Internet advertising, is a form of marketing and advertising which uses the Internet to deliver promotional marketing messages to consumers. It includes email marketing, search engine marketing (SEM), social media marketing, many types of display advertising (including web banner advertising), and mobile advertising.

 Like other advertising media, online advertising frequently involves both a publisher, who integrates advertisements into its online content and an advertiser, who provides the advertisements to be displayed on the publisher's content. Other potential participants include advertising agencies who help generate and place the ad copy, an ad server which technologically delivers the ad and tracks statistics and advertising affiliates who do independent promotional work for the advertiser.

CPM

CPM means Cost Per Thousand. (M is the Roman numeral for thousand – and so Cost Per Thousand).

This is the amount you will pay the ad-network or website publisher to show your ad a thousand times on their website or across their ad network.

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.

CPC

CPC means Cost Per Click. This is how much you would pay the ad-network or website every time a visitor clicks on your banner. CPC rates can be as high as $3 per click or as little as 5 cents per click. It depends on your product and your market – amongst other factors, the more competition there is – the higher you will probably end up paying as you compete with competitors.

CPA

CPA means Cost Per Action. The Action could be any of the following types of actions – A visitor clicking on your banner coming to your site and filling up a simple inquiry 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.

CTR

CTR is Click Through Rate. This is the percentage rate at which people click on your ad banner. 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 would you 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 even 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 it's low you should go in for a CPC.

The reason for this is simple. If you have a low CTR then 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 –

Example 1

Let's 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 us suppose you first buy 1,000,000 impressions.

This works out to $5000 ($5 per 1000 impressions x 1000)

Now let's 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 off you had bought 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).

Example 2

Let us 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.

Let's 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)

Summary

So, I am better of buying a CPM system for this banner ad campaign.From my personal experience, CPM has very little place in the life of the average webmaster, unless you’re lucky to be on the receiving end of thousands of visitors a day then it’s not worth your time.CPC, on the other hand, is much better for “normal” uses because you can manage your finances. CPC for sellers means ultra-targeted results and no payout if no one clicks it. CPC for publishers means that you don’t need massive traffic stats to make a difference to your bank account.