In online advertising and website monetizing, you will often come across certain terms which you have never heard of before.

If you are running a business and own a website, you probably must be aware of what advertising models such as CPM, CPC, and CPA are and their respective function.

In this blog, we are going to read about CPM, CPC, and CPA advertising models and also see how they differ from each other in terms of their roles towards making money on the Internet.

Illustration by Vrtcal

Summary:

What is CPM?

Cost per Mille (CPM) is also interchangeably called Cost per Thousand. It is the most common pricing method for online ads.

In this advertising model, the cost of an ad charged is per 1,000 impressions (or displays) by companies to advertisers. Here, an impression means how many times the ad is viewed on a website by the audience.

This marketing term denotes the price of 1,000 advertisement impressions on a single webpage.

If a website publisher charges, let’s say, $2.00 CPM, this can be interpreted in a way that an advertiser must pay $2.00 for every 1,000 impressions or views of its ad on the particular website.

Quite frequently, advertisers measure the success of a CPM campaign by the help of the click-through rate.

The click-through rate is the percentage of people who have viewed your ads on web pages and also clicked on them.

Thus, an advertisement that receives two clicks for every 100 impressions will have a 2% CTR (click-through rate).

However, you cannot measure an advertisement’s success solely by its CTR for the reason being that an audience views the ad but does not click on it, which may have an impact on generating revenue.

Advantages for the advertiser

Some advantages of CPM for the advertiser are given below:-

  • Easy to implement
  • It is helpful to increase brand awareness than performance
  • Low cost of advertising
  • Many inventories are available.

Disadvantages for the advertiser

Some disadvantages of CPM for the advertiser are as follows:-

  • It is more quantitative 
  • High risk of fraud impression
  • You are still billed even if the ad may is shown to the same person multiple times
  • It does not indicate action

Advantages for the publisher

The common advantages of CPM for the publisher are given below:-

  • Very limited risk
  • A fixed price and predictable income stream
  • Viewership is verifiable and quantifiable
  • There is no concern about CTR

Disadvantages for the publisher

Some disadvantages of CPM for the publisher are as follows:-

  • Revenue is much less anticipated than in CPC and CPM
  • It requires very high traffic
  • For making the advertising program successful, the publisher may need to give very much time and expertise
  • You get low paying ads and if clicks were generated, they are not paid

What is CPC?

CPC stands for Cost Per Click is an online advertising revenue model, where the advertisers are charged by the publisher each time an ad on the web page is clicked by a visitor.

It is also called Pay Per Click (PPC). In this advertising method, revenue is generated based on the number of times a visitor clicks on an advertisement.

CPC is mostly used when advertisers have a set daily budget. But, when the advertiser’s budget is hit, the ad is then removed from the rotation for the remainder of the billing cycle.

For instance, a website that has a CPC rate of 10 cents and offers 1,000 click-throughs will bill $100 ($0.10 x 1,000). The amount that an advertiser pays for a click may be set through a bidding process.

To calculate Cost per Click (CPC), the formula used is Cost per Impression (CPI) divided by percent Click-through Ratio (that is, %CTR).

CPC is the amount that a website publisher receives when a visitor clicks on the advertisement on the site.

Since a large number of businesses are done online and advertising is increasing rapidly, publishers usually look for third-parties in order to match them with advertisers – in this case, Google AdWords can be set as an example.

Advantages for advertiser

Some advantages of CPC for the advertiser are given below:-

  • There is a site-blocking filter list
  • The ad receives exposure even without clicks
  • It gives quickly high-quality traffic to the website
  • You are in  control of the budget

Disadvantages for advertiser

Some common disadvantages of CPC for the advertiser are as follows:-

  • It can be blocked by intelligent publishers
  • There can be tendering wars
  • It requires a moderate budget because it is very expensive
  • High possibility of fake clicks

Advantages for publisher

The common advantages of CPC for the publisher are listed below:-

  • It is a medium risk
  • Return of Investment (ROI) is more measurable
  • Attract more advertisers
  • Publisher collects more data with CPC to use in selling ads

Disadvantages for publisher

Some disadvantages of CPC for the publisher are as follows:-

  • All clicks are not count
  • CPC revenue is less predictable than CPM
  • Clicking advertisement may take visitors away from your websites
  • It requires a high click-through rate

What is CPA?

Cost per Action (CPA) is also recognized as Pay per Performance (PPM) or Cost per Acquisition (CPA).

In this advertising model, publishers only receive payment for completed sales.

For example, a newsletter subscriber goes further to purchase services from the advertiser.

Each time a user achieves this type of action, the advertiser pays the agreed rate.

Thus, when a company charges an advertiser using a CPA model, the advertiser only pays out if a user clicks and does a specific action, like purchasing a product or service via the ad.

Advantages for advertiser

Some advantages of CPM for the advertiser:-

  • No action equals no payment, so you only pay for performance
  • It provides sales leads
  • The ad receives exposure even without clicks
  • All risks and responsibilities are on the publisher

Disadvantages for advertiser

Some disadvantages of CPM for the advertiser are given below:-

  • It is expensive
  • It has the lowest conversion rate
  • More possibility of fake ads
  • It requires sensitive information

Advantages for publisher

Some advantages of CPM for the publisher are:-

  • Very limited risks
  • Creating an effective CPA program requires an investment of time and resources
  • Due to a higher value to the advertiser, it gives high revenue
  • It is a much less predictable revenue

Disadvantages for publisher

Some disadvantages of CPM for the publisher are as follows:-

  • Not paid according to clicks
  • It has a higher risk of frauds
  • You get free exposure to the ad even if no action is triggered
  • Tracking can be problematic

Difference between CPM, CPC, and CPA

Cost Per Mille/Thousand (CPM) is an effective way to brand awareness and delivering a direct message is the main target.

It doesn’t matter the visitors may click or not on the ads, it is still gaining exposure and promoting a specific message on high traffic websites.

Cost Per Click (CPC) is when advertisers pay only if the viewer clicks on the ad.

Mostly, CPC is used for promotion of a specific product to a niche market.

Similarly, Cost Per Action (CPA) is when advertisers pay only when the viewer makes a purchase of the product or service that can be directly traced back to the advertisement.

Its goal is to have the viewer purchase your product or services because of having an important factor i.e. high click-through rate.

The above graph shows the popularity of CPC and CPM online advertising models through 2017. Numbers don’t add up to 100% because of hybrid model
chart © 2018 Promise Media

Conclusion

With the above information, we focused on the transaction: an advertiser reaches a member of a publisher’s audience in some way and pays for that opportunity.

However, publishers use CPM, CPC, and CPA advertising models in different forms. A couple of examples:

Cost per click may become “cost per view” if a visitor views a video advertisement on your website, it charges for every time.

You might charge advertisers based on “cost per engagement” if the user floats his mouse over an ad or interact with it in some other way?

The revenue options available to publishers continue to grow, as media and the hardware people use to access it change. Strong advertising sales approach can align your business with the right online ad model.

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