If advertising on the Web is still a relatively new concept for your small business, you'll face a number of unfamiliar acronyms the first time you venture into the online advertising arena. These terms are important, since they describe how advertisers measure the success of an online ad -- and therefore how much they charge you to run it.
CPC refers to "cost per click" and means you pay for each click your ad receives. If you are spending $1 for each click, then 10 clicks will cost you $10.
CPA refers to "cost per acquisition" and means you pay only when the click actually turns into a sale. This form of measurement is most commonly used in affiliate marketing.
CPM refers to "cost per thousand impressions." An impression is a single instance of an ad appearing on a website.
"CPM, or cost per thousand impressions, is a highly relevant metric in today's Internet economy," said Ben Fisher of TheHostingNews.com. "CPM is still the most widely used statistic when it comes to display advertising."
"A website owners or advertiser looks at a few metrics when it comes to CPM advertising," continued Fisher. "The first is the CTR [click-through ratio]. A CTR is determined by the percentage of people that saw the ad and then actually clicked on the ad. If your ad is seen by 1,000 people and 10 people click, that is a 1 percent CTR."
Crunching the Numbers
When you are advertising via Google AdWords, banner ads, Facebook, or any type of online, visually-based ad, you can use the CPM and CTR numbers to figure out if you are getting a decent CPC.
You can calculate CPC fairly easily: If you spend $1 to get 1,000 impressions ($1 CPM) and you get 10 clicks (effective 1 percent CTR), then you paid $1 CPM and received a $0.10 CPC. Here's a handy tool for doing these calculations: http://www.anilbatra.com/digitalmarketing/cpm-calculator.asp.
CPM-based advertising may be more suited for your company if your desired keywords are very popular, which will make them very expensive. Instead of paying $5 for a single click with CPC, you could buy 1,000 ad impressions. This can add up over time.
Although click-through ratios for CPM-based advertising are low, click-throughs aren't everything. Even an unclicked (but viewed) ad can play an important role in promoting your company. A well-designed ad will catch a viewer's eye and may promote brand recognition, even if the viewer doesn't click or otherwise take action immediately.
Targeted CPM-based advertising is also beginning to catch on, which may even the playing field for advertisers looking for an alternative to costlier CPC. If you can display your ad to a targeted audience, your click-through ratios will improve.