Cost Measurement can be one of the more bewildering aspects of the online advertising industry. CPA, CPI, CPE, CPC, and so forth. There are just so many acronyms to learn!
And all of the different costing methods are calculated differently and used in different situations.
This article is going to give you a thorough introduction to the different cost measurements in online advertising and the various situations in which one might use them.
We will also look at how we can compare the performance of different cost measurements using “eCPM” or “Effective Cost per Mille.”
So, whether you’re working in the advertising field or are just curious about these acronyms you keep seeing, you’re in the right place.
The different kinds of Cost Measurement
Let’s start by breaking down the acronyms. These are the major measurements of cost in online advertising: CPM, CPC, CPA, CPI, CPE, and eCPM.
CPM or Cost per Mille
Don’t worry if you’ve never seen the word “Mille” before; it’s the Latin word for 1,000 (fun fact: this is the origin of the English word “mile”).
So
Example: An advertiser pays $10,000 for 4,000,000 views. To calculate the CPM, you divide the cost by the number of views and multiply it by 1000.
So, in this case:
(totalCost/totalViews) x 1000 = CPM
($10,000/4,000,000) x 1000 = $2.5
Our CPM would be $2.5
A variation of CPM called eCPM is the most popular way of benchmarking multiple cost measurement models with one another. We’ll cover eCPM later and go over a few examples of its calculation.
CPC or Cost per Click
This kind of cost measurement is extremely common, and its name is rather self-explanatory. The advertiser pays every time an ad gets a click.
If an advertiser pays $10,000 and receives 5,000 clicks, then his CPC would be calculated like this.
totalCost/totalClicks = CPC
$10,000/5,000 = $2
In this case, CPC would be $2.
These are the most basic means of measuring ad spend online, but there are many more that are “performance-based.”
CPA or Cost per Acquisition/Action
CPA is a cost measurement based on the acquisition, rather than on a per-view or per-click basis. In the case of CPM or CPC, the potential customer could very well click on a site, but not go any further.
If a company is trying to acquire users or registrations or make sales directly, then they aren’t going to be very happy unless their ad campaign actually drives these. A CPA cost basis allows advertisers to pay for performance.
That is to say, they only pay when an acquisition occurs, be it the purchase of a product or the registration of a new user. Many advertisers are significantly more comfortable with this kind of cost basis.
How is CPA calculated? It’s quite simple. If an advertiser wants to drive registrations and he spends $10,000 and receives 1000 registrations, then the calculation is:
totalCost/totalAcquisitions = CPA
$10,000/1000 = $10
CPA in this case would be $10.
CPI or Cost per Install
CPI is a widespread cost measurement in the mobile advertising world, where many of the advertisers are trying to drive App installs. Much like CPA, this performance-based cost model allows advertisers to spend only on success, rather than paying by view or click. Models which aren’t guaranteed to drive installs, even if money is spent.
The formula here is similar to the CPA formula:
totalCost/totalInstalls = CPI
$10,000/500 = $20
So in this case CPI would be $20.
CPE or Cost Per Engagement
Cost per Engagement can mean one of two things. In general online advertising, it is the cost per engagement with an AD. This is slightly more qualified than CPM (i.e., the ad was interacted with rather than just viewed), but less qualified than CPC (engagements will almost always be higher than clicks). In this case, CPE is the cost per engagement with the ad.
As mobile advertising continues to take off, it is important to understand another form of Cost per Engagement.
CPE is likely the most nebulous and difficult to understand of the various cost measurements. One of the reasons that it can be so difficult to understand is the fact that what “Engagement” means can vary by case. This is because mobile advertising engagement is defined by an event that occurs after an application is installed.
Paying by engagement, at its base level, is a way to go even further with performance advertising. Let’s take a look at when one would use CPE.
Take an app, for example. Maybe the developer has run a CPI campaign before, but he realized that only a small percentage (say, 10%) registered to use the application after install. The rest either forget about it or uninstalled it shortly after installation.
If the developer wanted to pay exclusively for people that not only install the app but then register and use it once, he could launch a CPE campaign. Any user that got past registration or initial setup would be considered “engaged,” and that’s what the developer would pay for.
totalCost/totalEngagements = CPE
$15,000/900 = $16.67
So our CPE in this case would be $16.67.
How are these used?
Different cost measurements are used for different situations and to meet different goals.
While CPM may be perfectly adequate for an ad campaign that is designed to raise awareness or introduce a product or brand, it’s significantly less suitable for an e-commerce store.
CPI and CPE are very common ways of running campaigns for developers and mobile app companies that are trying to build a mobile audience. If someone just sees the add, that doesn’t do them much good, since they can only make money if the app is used.
So these
These performance metrics are often used on the demand side, where the advertiser is concerned exclusively with the result.
Publishers, on the other hand, are only concerned with the revenue generated per pageview or per ad served. Therefore they are typically concerned exclusively with eCPM.
eCPM is special
An issue that advertisers began to run into as they moved onto more developed, performance-based cost measurement systems, is that their results were difficult to compare.
It’s hard to objectively see if a CPC of $4 is better or worse than a CPI of $8 or a CPE of $17. They’re just too difficult to compare because they use different pricing methods.
But they do need to be comparable.
Otherwise, it is significantly more challenging to determine which campaigns are performing the best if they’re being run using different standards of cost measurement.
This is where eCPM comes in. eCPM stands for “Effective Cost per Mille” or the effective cost per 1000 views. eCPM can be calculated from any of the above-stated cost measurements.
Let’s look at some examples.
Example 1 CPI to eCPM
Let’s say an app is being advertised on a CPI basis. To calculate we need the CPI, the total number of installs, and the number of people that viewed the ad in the measured period of time.
Say, the app was installed 100 times at a CPI of $5, and 500,000 people saw the ad itself. The formula to be used in this case is:
((CPI x totalInstalls)/totalViews) x 1000 = eCPM
(($5 x 100)/500,000) x 1000 = $1
So eCPM for this CPI campaign would be $1.
Remember, it’s multiplied by one thousand because we’re looking at units of 1000 views.
Example 2 CPE to eCPM
Now let’s try CPE to eCPM. Say the measurement of engagement is an in-app purchase after a mobile application is installed.
If a given campaign has a CPE of $18, 400 engagements, and 2.2 million views, its eCPM would be calculated like so:
((CPE x totalEngagements)/totalViews) x 1000 = eCPM
(($18 x 400)/2200000) x 1000 = $3.27
So eCPM for this campaign would be $3.27
Example 3 CPA to eCPM
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Say a company has a CPA campaign. And their CPA is $4, the number of acquisitions is 150, and the number of pageviews is 410,000.
((CPA x totalAcquisitions)/totalViews) x 1000 = eCPM
(($4 x 150)/410000) x 1000 = $1.46
So the eCPM for this campaign would be $1.46.
Comparing eCPMs
While advertisers might focus on performance-based payment models, publishers are only concerned with eCPM. Why? Because eCPM is the most accurate way to look at the revenue generated by traffic.
How the ad is being paid for further up the line isn’t consequential to the publisher. He just wants to see what he is getting paid per thousand views he draws.
In our three examples of eCPM calculated from CPI, CPE, and CPA, which of the three campaigns would be the most profitable for a publisher?
That would be Example 2, the CPE campaign that resulted in an eCPM of $3.27, significantly higher than the eCPM of the other two campaigns.
For a publisher, this second campaign would be significantly more profitable. Were there only space for one, that’s the one that the publisher would prioritize.
Conversion Flow Length and Cost
Conversion flow and its relation to cost is rather logical, at least once understood.
What is it? Conversion Flow is simply the number of steps that have to be completed before an ad counts as converting. For example, the Conversion Flow for a CPI campaign would go View > Click > Install.
A CPE campaign, on the other hand, has a longer Conversion Flow: View > Click > Install > Post-install Engagement.
So, as you can see, the Conversion Flow of a CPE campaign will always be longer than a CPI campaign, because of this the price will be (potentially significantly) higher.
So keep in mind that the longer the conversion flow, the high the cost per conversion in a performance-based campaign.
Conclusion
Now you should have a pretty good understanding of the basic terminology used in describing cost in online advertising.
The different measurements of cost form a considerable part of the online advertising vocabulary. So a deep understanding of them is necessary if you want to understand what’s going on.
Now, though, the next time you run into a table full of acronyms and numbers, you’ll be ready to parse it without fear.
Lastly, an important thing to remember is that all of these different means of pricing and costing a campaign exist because they are useful in different circumstances and with different clients. But it is Effective Cost per Mille that is the most useful for cross-campaign comparison and analysis. And it is undoubtedly the most important metric for publishers.
Mobinner is a High-Performance DSP that allows you to build, launch, run, and analyze campaigns that drive engagement and growth for your business.
