CPM, CPA and CPC are ideas from the digital advertising, and refer to “Cost per Impression,” “Cost per Click” and Cost per Action,” respectively. CPM prices ads by impression, or times the ad is seen. CPA prices ads based on completion of specified behavior by the consumer, say product purchase or email sign-up. CPC prices ads based on the number of click-throughs, or number of consumers who follow the ad to a specified url.
Q. So, a lot of the biggest startups these days have a business model that depends one way or another on advertising, so let’s spend a minute on how these models work. To start, what’s CPM?
A. This is the most common way of charging for internet ads: its a cost per thousand impressions. So if the CPM is $10, an advertiser will pay 1 cent each time the ad is seen. He might pay that to the site publishers, or to an advertising network that handles the inventory for the publisher and includes that site in the network.
Q. And of course the better advertisements perform, the more clicks they generate, the better the CPM rate will be.
A. Yes, and, as an investor, if you do some math with the CPM and a site’s audience reach, you’ll be able to do some revenue forecasting. Btw, one very interesting point here is that Facebook’s CPMs are actually much lower than the industry average, exactly the opposite of what you’d expect after all the talk about how well they can target ads to users and how effective those ads will be. Their CPM rates make that a argument at least questionable.
Q. OK, and what are some of the other ways advertisers are charged?
A. There are several others, like “cost per action.” That’s the other extreme from CPM. In those deals, the advertiser only pays if the ad is viewed, clicked on, and the customer actually goes all the way through and completes some desired action, like becoming a member of the advertising site. Obviously, those rates are much higher.
Q. And there are in-between models, like CPC: Cost per click.
A. Right. CPC is really a big one for text ads, for Google and the other paid search services. Here, the advertiser pays if the ad – a search term in Google’s case—is clicked on. As you know, this spawned a real revolution because advertiser bid against each other in an open auction for the right to have a given term direct people to their site.
Q. And I suppose these models will keep evolving as mobile becomes ever more popular?
A. Sure. There already is a CPV standard, “cost per visit”, but so far it means a visit to a website. With all the geo-social check-in apps out there now, getting to a “cost per physical store visit” is suddenly realistic. Strange but true.
