There are many terms in the field of affiliate and digital marketing that are widely used but rarely explained: marketers, advertisers and publishers consider them to be common knowledge. One of the most common among them are the abbreviations CPM, CPA and CPC.
It’s essential to be confident in these terms in order to understand what every other conversation in affiliate marketing is about, not to mention the more advanced concepts discussed in articles and specialized forums.
So let's find out what CPM, CPA and CPC in affiliate marketing are.
How Advertising Models Were Born
Advertisement is a piece of information that appears in front of the reader for a fee, and it was born with the spread of mass print. But as soon as text and visual advertising began to appear in periodicals, a reasonable question emerged quickly: how is its cost determined?
Before the Internet, the answer was quite obvious: by the number of people who will see it. For instance, a magazine with a circulation of 10,000 copies counted on being paid by an advertiser for each copy published - regardless of whether people opened it on a page with an ad or even bought it. The advertiser paid the magazine publisher per nominal thousand impressions - a thousand appearances of ads before the readers’ eyes, regardless of its effectiveness. This model became known as Cost per Mille (CPM).
With the advent of commerce on the Internet came the opportunity not to simply pay for an ad and wait for customers, but to get to know what potential customers will do when they see your ad. They might show interest by clicking through to your site, and then take some action on it, up to making a purchase - and all of that can be tracked through an online ad.
This means the value of placing an ad could now be calculated not only through passive impressions but through active customer actions - Cost Per Click (CPC) or Cost Per Action/Acquisition (CPA).
So, when it comes to either of these models - we're talking about an agreement on what action with the ad will be paid for.
CPM, CPA and CPC Meaning
We figured out where the names of these models came from. But what is the point of them and when should they be used? To understand that, we need to explore each one in more detail. Let's start with the oldest one:
Cost Per Mille (CPM)
Also known as Cost Per Thousand (CPT) - Mille comes from the M sign, which in Latin means "1000", so you might encounter both abbreviations. This is the cost per thousand appearances of your ad on user-open pages. This unique appearance of an ad in internet marketing is called an impression.
CPM is a basic metric from which all other more complex ones may be calculated.
When it comes to CPM Campaign - it means that the advertiser pays a fixed amount for every thousand unique impressions, which is calculated by a formula:
CPM =Total cost of ad placement/Number of thousands of views
For example, a site has traffic of 10,000 users per month. If you have to pay $100 a month for an ad placement, the CPM=$10. But how do you determine whether it's expensive or cheap?
This is influenced by many factors: the geography of the ad display, the websites' topics, the quality of the ad itself, and even the season of placement. These are all factors that can affect the price in both directions, but the main thing to remember is that if you want to calculate a certain profit from such a campaign - it will be as approximate as possible.
This is because CPM campaigns are designed to increase brand visibility and awareness, and with this metric, it's easy to calculate the maximum number of people who can learn about your product on your advertising budget, but you don’t have any control over the cost of actions those people will take.
Two possible misconceptions follow from this:
1. Cost Per Mille provides the lowest cost per view.
It would seem logical - each display is just a demonstration of a product, there is no guarantee that the user will even look in the direction of the ad, let alone make a purchase.
However, demand breeds supply, and if in a broad niche one CPM display can really cost almost nothing, but on specialized resources, and especially in the right season - both the cost of advertising and its effectiveness can be very surprising.
2. The CPM model is not viable if you need to increase sales.
In this case, you should not confuse the metrics you use with the goals of the campaign.
Let's return to the situation when your product is advertised on specialized resources during the high season. Yes, when you build a campaign on CPM, you can't possibly know the further performance of those views - because you don't have data on clicks and conversions on your ads.
But if you're confident in buyer activity - the cost per impression can be even lower than when you're relying on metrics that are positioned down the sales funnel - like CPC. And in their turn, the CPC rates on particular platforms might be highly inflated and you might end up paying more for empty clicks which, as well as impressions, do not guarantee sales per se.
These examples might seem quite advanced, but they illustrate the main point: it's not the nominal cost of impression that matters, but what forms it, and that an understanding of campaign goals comes before the choice of a specific model.
Both are easier to understand with more data, and CPM is a great metric and an instrument to get the data on potential outreach and basic costs of ad campaigns.
However, if you are interested in more detailed data on user behavior and aim to pay not for passive impressions, but for specific actions, it is worth examining the following models.
Cost Per Click (CPC)
The name for this metric is quite self-explanatory: only impressions followed by clicks on a link/banner count. This format emerged in the early ‘90s web and is still very much alive today, using something that magazine ads lacked - the ability of the viewer to interact with the ad.
This model of advertising is used in display advertising - banners, clickable pop-ups and so on. Such ads are shown to the selected users, based on impersonal information like cookies, operating system, language, etc.
It is a bid-based model, which means the price of the ads is formed through the automatic bidding auction:
- The Advertiser indicates the maximum cost per click he is satisfied with.
- The Publisher (advertising network) runs an automatic internal auction between all existing ads.
- Advertising of the right quality and with a sufficient bid wins the auction.
- The winning ad is shown to the user.
If the user clicks on the displayed advertisement - the bid amount is taken from the advertiser. Unlike CPM, payment happens only for those who interact with ads, not just for display, which means that the advertiser pays for users that are at least somewhat interested in the ad.
The ability to customize the ad's targeting area and specific keywords that interest you allows to further narrow the audience, and therefore potentially increase conversion rates. And as soon as the ad budget for clicks is exhausted, the ad is removed from the auction, until the advertiser’s account is refilled.
You should not confuse CPC with PPC (Pay Per Click), another bidding model working on a similar principle to CPC.
PPC works with contextual advertising, not display advertising. This is a kind of model common in search engine listings of Google and Bing. Such ads are called contextual ads because they appear based on keywords on that page.
It has two methods of cost calculation: this is either Flat-rate PPC, in which the advertiser and publisher agree on a fixed rate for each click on the ad, or Bid-based PPC, which has a more flexible system similar to bid-based CPC.
The common rule about CPC advertising is that the number of impressions is less than the number of clicks and the price is higher than for CPM, but it pays off with more targeted advertising. As a metric CPC gives a better insight into the users who are ready to make a target action, starting from a website click and ending with a purchase.
And if you as an advertiser are interested in target actions, then there is a whole family of special models for this.
Cost Per Aсquisition/Action (CPA)
Pay per click, although theoretically cuts off users who came in "just-looking", still gives too little information about what the user will do next, while already taking payment for the transition to the advertiser's site.
Then CPA comes to the rescue, which will charge only when the user performs a desired goal on the advertiser's site, in other words, for a conversion. In this case, the conversion can be considered:
- product purchase (CPS - Cost Per Sale)
- lead, from the user's phone or email to the filled questionnaire (CPL - Cost Per Lead)
- app installation (CPI - Cost Per Install, usually used for mobile apps)
- other target actions (visiting a specific page, downloading a file, watching media, etc.)
All those models imply that advertisers pay only for the users they really want, without spending money on empty impressions and clicks. Unfortunately, this often conflicts with the incentives of publishers to maximize the amount of "playing" bids for them and this way their profits.
Because of this conflict of interest, good traffic is getting more expensive, while the payments for advertisers stay flat. That's why there are smart bidding models like CPA Target from Kadam, Target CPA for Google, CPA Goal for PropellerAds and many others. They try to pick up traffic that has a high probability of converting, but at the same time won't bankrupt the advertiser.
This is the reason why the CPA model is so popular in affiliate marketing: it essentially works on the same principle - payment is a commission for targeted action. For the same reason, the CPA model works best with product advertising and companies that sell their services primarily online.
And with the global shift to online commerce of recent years, the list of such companies has expanded dramatically -- so that the cost of CPA has jumped up in many areas, which has increased the burden on advertisers who need to pay more for the same actions.
Metrics for CPM, CPC, CPA in Performance Digital Marketing
Performance marketing is a subsection of digital marketing, where the relationship between advertisers, intermediaries, etc. is governed by a performance relationship, i.e. when payments are made for useful actions.
And after we learned the basic terms for advertising models, we can arm ourselves with standard metrics of performance marketing that are used to evaluate the effectiveness of said models. So let’s get familiar with the most important ones.
What if There is an “e” Before “C”? eCPM, eCPC, eCPA…
The small "e" in front of Cost Per is not a pointer to yet another format you don't know, it's just short for "effective". It's calculated differently based on a bidding model you are using - but regardless of the bidding model, it simply represents the actual bid for which you are buying the impression or desired action.
In fact, this is the only metric an advertiser should care about - because it's what determines the real cost-effectiveness of their advertising campaigns. You can learn how to calculate effective Cost Per Anything for each model and improve these metrics in our in-depth guide on this topic.
Return Of Investment (ROI)
It is a percentage value, which is the ratio of your income to the investment you made. A negative ROI is a loss, while a positive ROI is a gain. ROI can, and often in the opinion of your investors should exceed 100%. But for advertising campaigns, especially in the initial stages, a positive ROI is already an indicator of movement in the right direction.
CTR and CR: Don't Confuse Them!
Click-through Rate (CTR) and Conversion Rate (CR) are the two metrics that are extensively used in performance marketing. Both metrics are percentages that show the activity of your users. So how do you not get them mixed up?
Click-Through Rate (CTR) is a measure of how attractive the ad is to the users on its own. It indicates how many of the users who saw the ad decided to click on it.
Here's the formula for calculating CTR:
Conversion rate (CR) - this is about what happens after the click, the actions of those who have already visited the site. Consequently, it describes the ratio between all clicks and the number of conversions.
So the basic formula for CR is:
Both metrics are associated with different stages of sales, but both are crucial for understanding the effectiveness of your advertising.
Media Buying Campaigns and Fraud
Everything in performance marketing is tied to calculations because the whole industry is focused on maximizing advertising profits.
The CPA network only pays affiliates for targeted actions. Affiliates only pay the ad network for specific users. There will always be someone in this system who wants to take advantage of the system for a shortcut.
Publishers can drive bots to their site so that the ad network will pay them for traffic that in fact didn't happen. The CPA network may underestimate the number of conversions that actually came to the offer, so as not to pay the affiliate. Those cases are few, but this still happens.
So for the sake of your is crucial to:
- work with reliable partners
- double-check everything
Regarding the first point - choose partners by review, read those reviews, try to run with a small budget, rather than sinking all the money into the first campaign. Be rational, be careful, use common sense.
The second point is even simpler: use trackers like Voluum, Binom, etc., so that neither the advertising network nor the affiliate network could feed you fake statistics.
Bottom line
We hope that now you better understand the difference between CPM, CPC and CPA pricing models and the surrounding terminology, so you’ll feel confident the next time you discuss buying advertising from Google, Facebook, or any other advertising network.
If you not only learn the letters but really grasp what those formats are and how each one is used, all further subtleties of the affiliate marketing world will open up to you with ease. And from this point on, whenever you watch videos, read articles or communicate professionally, you will never find yourself in a situation where a three-letter word will throw you into a stupor.
FAQ
What are CPC and CPA in digital marketing?
CPC stands for Cost Per Click and means that the advertiser pays for every click on his ad. CPA means Cost Per Action and in this case, the advertiser pays for specific action performed by the user on his website, e.g. leaves their email or phone number, makes a purchase, installs an app, etc.
What is the difference between CPC and CPA?
CPC is used when the main goal is to funnel users to the website under the link/banner. CPA is preferable when the advertiser needs to make users do something on a website - from leaving a lead to making a purchase.
What is CPC, CPM, CPA pricing?
The pricing depends heavily on the competition for constant keywords, niche of advertising and even season. As a rule of thumb, CPM is the cheapest, CPC will cost slightly more and CPA is the most expensive one. Also, you have to remember that with CPA and CPC you pay only for specific actions, while CPM makes you pay for every 1000 impressions regardless of users’ actions.
When is it better to choose CPM?
When you are sure that the interest in your product is high enough to give you many click-throughs, or if you are interested in increasing the visibility of your brand and sales are a secondary metric.
What is CPS, CPL, CPI?
These are the specific names for CPA-type models: Cost Per Sale (CPS), Cost Per Lead (CPL) and Cost Per Install (CPI).
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