In the world of digital advertising, there are various pricing models that advertisers and publishers can use to buy and sell ad inventory.
Five of the most common pricing models used in programmatic advertising for publishers are CPM, eCPM, CPC, CPD, and RPM. Each pricing model has its own advantages and disadvantages, and choosing the right model for your monetization goals is crucial.
In this article, we will explain what each pricing model measures, how they are calculated, and when they are best used.
What is a pricing model?
A pricing model in programmatic advertising refers to how publishers will be paid for displaying ads on their websites or mobile apps.
The most common pricing models include CPM and CPC. CPM pays publishers based on the number of impressions or views of an ad, while CPC pays based on the number of clicks the ad receives.
What is a CPM in advertising?
CPM stands for “cost per thousand” impressions. More specifically, it calculates the cost of an ad per thousand impressions.
An impression is the number of times an ad is displayed to a Web user. CPM is used to measure the cost-effectiveness of an ad campaign, and it is commonly used for brand awareness where the main objective is to increase the visibility of a brand.
What is the formula to calculate CPM?
The formula for calculating CPM is straightforward. It is the cost of the ad divided by the number of impressions, multiplied by 1,000. For example, if an ad costs $5 and is shown 5,000 times, the CPM is $1. Here’s the formula:
CPM = (Cost of the Ad / Number of Impressions) x 1,000
In the above example, the CPM would be calculated as follows:
CPM = ($5 / 5,000) x 1,000 = $1
When is CPM best used?
CPM is best used when the publisher aims to reach a broad audience and maximize ad revenue. It is particularly effective for publishers with a large ad inventory and diverse audiences.
This is due to CPM pricing enabling publishers to generate revenue from every ad impression, regardless of whether or not the user actually engaged with the ad. In other words, even if a user doesn’t click on the ad, the publisher will still get paid for showing it.
CPM pricing can also be used in situations where the publisher wants to maintain a certain level of control over their ad inventory. For instance, it’s typically used for direct deals which allows the publisher to negotiate the terms of the deal and maintain control over the ads that are displayed with their content.
Pros and Cons of CPM
While CPM has several advantages, there are also some drawbacks to using this pricing model.
- Revenue generation: CPM pricing is a reliable way for publishers to generate revenue from their ad inventory. They get paid for every impression of an ad, even if the user doesn’t click on it. This ensures that publishers are compensated for the ad space they provide, regardless of user engagement.
- High CPM rates: Publishers with premium inventory and niche audiences can often command high CPM rates from advertisers. This means they can earn more revenue for each impression of an ad displayed on their website or app.
- Brand awareness: It is effective for building brand awareness as it enables advertisers to reach a larger audience.
- Control: Typically, measuring campaign success via CPMs is used for direct deals between publishers and advertisers. This allows the publisher to negotiate the terms of the deal, maintain control over their ad inventory, and ensure that only high-quality ads are displayed against their content.
- Lack of user engagement: CPM pricing doesn’t take user engagement into account. Publishers get paid for every impression of an ad, even if the user doesn’t click on it or interact with it in any way.
- Low-quality ads: It may encourage advertisers to prioritize quantity over quality. Since advertisers are paying for every impression of their ad, they may be less concerned with the ad’s quality or relevancy to the publisher’s audience.
- Unsold inventory: It is not effective for unsold inventory as it only generates revenue when an ad is displayed. This means that if there are no advertisers willing to pay for an impression, the publisher will not earn any revenue.
- Difficulty in tracking ROI: CPM pricing doesn’t take into account the performance of the ad. This makes it difficult to track ROI and optimize campaigns for maximum effectiveness.
What is eCPM in advertising?
CPM and eCPM (effective cost-per-thousand impressions) are two commonly used pricing models in programmatic advertising. We’ve covered CPM, whereas eCPM takes into account the effectiveness of the ad campaign and calculates the cost for every thousand impressions based on the revenue generated per impression.
eCPM is better for measuring ad revenue as it considers the number of ad impressions and the revenue generated from those impressions. It provides a greater understanding of the effectiveness of a publisher’s ad campaigns and helps them optimize their pricing strategies accordingly.
If you are using GAM (Google Ad Manager) to manage your ad monetization, you will notice that they have three different types of eCPMs.
- Ad request eCPM: it’s derived by dividing your total ad revenue by the number of ad requests × 1,000. It looks at the overall number of ad requests made to an ad exchange (GAM), but not necessarily filled by said ad exchange. This metric represents the revenue received per a request made for an ad creative which also factors in fill rate.
- Matched eCPM: it’s calculated by your total ad revenue divided by the number of matched requests × 1,000. This metric displays the CPMs buyers are willing to pay. Matched eCPM standardizes how different networks count impressions and pay at different points in the ad-serving process.
- Ad eCPM: which we’ve previously discussed, is the result of dividing your total ad revenue by your ad impressions × 1,000. It shows the resulting CPM that advertisers paid per Ad Exchange impression. More ad networks count impressions and generate revenue after the creative is served, which is why this metric is more commonly used and is the default eCPM metric in GAM.
What is CPC in advertising?
CPC stands for “cost per click.” Advertisers pay for every click on their ad, regardless of how many times it is displayed to Web users. CPC is commonly used for performance-based campaigns where the main objective is to drive traffic to a website or landing page.
The success of a CPC campaign is typically measured by the number of clicks and its CTR (click-through rate).
What is the formula to calculate CPC?
The formula for calculating cost per click is the cost of the ad divided by the number of clicks it receives. For example, if an ad costs $10 and receives 100 clicks, the cost per click is $0.10. Here’s the formula:
Cost Per Click = Cost of the Ad / Number of Clicks
In the above example, the cost per click would be calculated as follows:
Cost Per Click = $10 / 100 = $0.10
When is CPC best used?
One scenario where CPC can be advantageous for publishers is when they have high-quality traffic and can generate a significant number of clicks on their ads. By using CPC, publishers can ensure that they are receiving fair compensation for the quality of their traffic and the level of engagement that their ads generate.
Pros and Cons of CPC
- Audience type: It’s beneficial for publishers with high-quality traffic and a significant number of clicks generated by their ads.
- Better monetization: This can allow publishers to earn more revenue per click by charging higher rates for more targeted traffic.
- ROI: Provides a direct metric for measuring the effectiveness of the ad campaign in generating clicks and engagement.
- Market factors: The level of competition in the market can significantly affect the amount that publishers are able to charge for clicks.
- Fraud: Click fraud and bot traffic can artificially inflate click volumes, reducing the quality of the traffic and leading to lower revenue for publishers.
- Additional costs: Publishers may need to invest in monitoring and verification processes to ensure the accuracy and reliability of their click data, which can add to their operational costs.
What is CPD in Google Ad Manager?
CPD, or cost-per-day, is used when advertisers pay a fixed amount to display their ads on a publisher’s website for a set period, usually a day. The advertiser is charged a certain amount regardless of the number of impressions or clicks the ad receives during that day.
This model is best suited for advertisers who want to have their ads displayed prominently on a high-traffic website or during a specific time period. For publishers, CPD can provide a steady and predictable revenue stream and can be particularly effective for special events or limited-time promotions.
What is the formula to calculate CPD?
Calculating CPD is a simple process. The advertiser and publisher negotiate a fixed rate for displaying the ad on the publisher’s website for a set period of time, typically a day. The fixed rate is then divided by the number of days the ad will be displayed to calculate the cost per day.
For example, if the fixed rate for displaying the ad for a week is $500, the cost per day would be $71.43. This amount is paid to the publisher for each day the ad is displayed on their website during the agreed-upon period.
Cost Per Day = Fixed rate / Number of days in the campaign
In the above example, the cost per day would be calculated as follows:
Cost Per Day = $500 / 7 = $71.43
When is CPD best used?
CPD is best used when a publisher has a high-traffic website and advertisers are looking to display their ads prominently during specific time periods, such as big promotional campaigns.
This can be particularly useful for publishers who have difficulty forecasting their inventory or for those looking to maximize revenue during peak traffic periods.
Pros and Cons of CPD
- Predictable revenue stream: Publishers can forecast revenue for a set period of time, making it easier to plan their business activities.
- Guaranteed ad exposure: Advertisers agree to display their ads on the publisher’s website for a set period, providing a guaranteed level of ad exposure.
- High earning potential: With the right negotiations, publishers can earn a significant amount of revenue, especially during peak traffic periods.
- Limited revenue for unsold inventory: Publishers may be unable to earn revenue from unsold inventory during the agreed-upon period.
- Risk of low traffic: If traffic levels are lower than anticipated, publishers may earn less revenue than expected.
- Difficulty in adjusting prices: Once a rate is agreed upon, it can be challenging to adjust prices mid-campaign.
What is an RPM in advertising?
RPM is a pricing model that calculates the revenue earned for every thousand pageviews that are served on a publisher’s website.
This model is often used by publishers who have a steady stream of traffic on their websites and are looking to maximize their revenue. RPM takes into account not only the number of ad impressions served but also the revenue earned from those impressions.
RPM is a useful metric for publishers with high CTRs (click-through rates) for their ads. This particular pricing model incorporates the revenue created through ad clicks on top of impressions.
What is the formula to calculate RPM?
Similar to eCPM, RPMs are calculated by taking the total ad revenue and dividing it by the total number of pageviews, multiplied by 1,000. Both metrics are meant to assist with gauging ad revenue potential.
For example, if a publisher earned approximately $200 from 60,000 ad impressions, your ad RPM would equal $3.33.
RPM = (Total revenue generated / Number of Pageviews) x 1,000
In the above example, the RPM would be calculated as follows:
RPM = ($200 / 60,000) x 1,000 = $3.33
If you are using Google AdSense, it will use RPM and eCPM interchangeably.
When is RPM best used?
RPM, or pageview RPM, is best used when a publisher seeks to maximize revenue from their ad inventory.
The main concept is that every user has some form of monetary value associated with them. Apart from our regular RPM, there are two additional RPM-related metrics to consider:
- Session RPM: This looks at the revenue generated for every thousand sessions. It is calculated by taking the total advertising revenue and dividing it by the number of sessions and multiplying it by 1,000.
- Impression RPM: Similar to Session RPM, except now we’re looking at impressions. It is calculated by dividing the total revenue by impressions and multiplying by 1,000. As you may see, it’s the same formula for eCPM.
RPM accounts for a range of factors such as viewability, ad placement, device type, geography, and much more to paint a general picture as to what every 1,000 pageviews are valued at.
Pros and Cons of RPM
- Revenue potential: RPMs give publishers an estimation of their potential revenue.
- Optimizations: Publishers can use RPMs to analyze their total ad revenue and compare it against various factors such as ad networks or placements. This gives them the ability to test what’s working, and what isn’t.
- Estimation: While RPMs are a good indicator of earnings potential, it’s just that. An estimation. A publisher’s real earnings may be different.
- Wrong story: While there are multiple ways to increase one’s RPM (like adding more ad units on page), it may sacrifice user experience.
We’ve covered the five main pricing models in ad tech, namely, CPM, eCPM, CPC, CPD, and RPM. Each pricing model has its own unique advantages and disadvantages, and the best pricing model to use depends on the specific goals of the advertising campaign.
CPM is commonly used to achieve high reach and brand awareness, while CPC is effective for campaigns focused on driving traffic and clicks. CPD is used to achieve specific monetization goals, and RPM is effective for analyzing your earnings potential.
Understanding the different pricing models and how to calculate them is crucial for success in the programmatic advertising ecosystem.
Publishers need to make data-driven decisions when choosing a pricing model and setting bids for their campaigns. By analyzing the performance data of each pricing model, publishers can determine which pricing model is most effective for their specific goals and optimize their campaigns for maximum ROI.
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