One of the great things about digital advertising is the array of options available to ensure optimal return on your investment. As they become more trackable, sophisticated and targeted, digital advertisements make it possible to be strategic about your spends and measure throughput carefully.
There are several digital advertising pricing models. The two most common are cost-per-thousand (CPM) and cost-per-click (CPC).
CPMs are billed at a flat rate for every 1,000 impressions. An impression indicates that an ad has been displayed (made an impression) on a given channel, regardless of whether it was clicked. For example, a $15 CPM would mean you are paying $15 every time your ad is displayed 1,000 times. With the CPM model, you are paying for your ads to be seen, and any proceeding clicks are free.
CPCs are self-explanatory: you pay a certain amount per click. This means that your ads could be displayed 5 million times, but if no one clicks on them, you don’t pay a dime. In Google Adwords, the price you pay per click is determined by the marketplace value of the keyword or search term you associate with your campaign. Keyword values are algorithmically determined based on several factors including ad quality scores and competition for said keyword in the marketplace. CPC is also a pricing model commonly used for Facebook ads, where your cost-per-click is determined by things like your target audience and ad quality.
Which Do I Choose?
So you’re ready to launch an ad campaign. How do you choose which advertising pricing model is right for you? Well, several factors play a role, including your budget, the goals of your overall campaign (more interested in awareness? CPM might be better. Want more traffic to your site? Try CPC), and the channels you wish to advertise on (i.e., CPC models usually do better on Facebook). However, it’s equally important to take into consideration the quality of your ads and the effectiveness of what happens further down the funnel.
In a holistic sense, if you believe your ad will perform well (high click-through rate) but the remainder of your sales funnel isn’t particularly effective, CPM is the way to go, as it will send more clicks per 1,000 impressions into your funnel, creating more opportunities and increasing the chances of achieving conversions.
On the other hand, if your funnel is more effective at churning out conversions than you believe your ad will be at garnering engagement, CPC is the better option. You will optimize your spend by not paying for impressions that don’t lead to clicks, and the clicks you do achieve put people in your funnel which then does its job of converting opportunities to customers.
Scenario 1: $15 CPM ad (you would spend $15 per 1,000 impressions)
Scenario 2: $1 CPC ad (you would spend $1 per click)
With a high click-through rate (high quality ad) of 5%:
In scenario 1, you would achieve 50 clicks out of 1,000 impressions and spend $15. Alternatively, you would only be achieving 15 clicks (at $1 each) by spending the same amount in scenario 2. Scenario 1, or the CPM model, is best here.
With a lower click-through rate (lower quality ad) of 1%:
In scenario 1, you would achieve 10 clicks out of 1,000 impressions and spend $15. Alternatively, you would be achieving 15 clicks by spending the same amount in scenario 2. Scenario 2, or the CPC model, is best here.
It may not be immediately apparent which pricing model is the best for you at the outset of your campaign. It takes time to see how your ad is performing and to determine the return from your payment model. Make sure to track your metrics, including click-through rate, and make adjustments as necessary to optimize your return on investment.