How to Make Sense of CPC, CPM, CPA, CAC, etc.

If you are new to these metrics or are looking for a refresher I will try and get at the "why" behind these metrics. I'll also list out what these mean and how they are calculated.

First off, in principle there are a few things to note about these metrics:

  • They are "calculated metrics" which means they are not stand alone numbers - each one has its own formula, which I have listed below in the glossary.
  • They are standard negotiations between publishers and advertisers. 
  • They are metrics that represent a business model or a funnel.

Now that we have got a few of the basic things out of the way let's cover why they are important. These metrics represent the relationship between a publisher and an advertiser. You could also say they are "agreements" between the two parties. Publishers are the one who owns the real estate, content or place in which the advertiser wants to put their ad on. A few examples of publishers are Google, Facebook, Yahoo, and so forth. You could also be a website, for example, if Mother.ly was selling an advertising slot on their website they would be the publisher. The advertiser can be individuals, brands, businesses, products or anyone who wants their advertisement listed on a publishers platform. The party we haven't listed here is the underlying driver who adds the value to the equation for both parties, and that is the user. Meaning you and me! We are the reason these agreements exist. 

The most common agreement we see online today is CPC. Very practically if I click on an advertisement on Google then the advertiser, in this case, Amazon.com, will pay Google some agreed price for my click on that first link.

That is just CPC, now there are other options like CPM which means Cost Per Mile. Mile, in this case, means 1,000 impressions. So CPM is the cost for 1,000 impressions of an advertisement. Another option is CPA or Cost Per Acquisition. The acquisition is based on an event on your website or app like a sign-up or account created. I write about how to set up these CPA events in this post here. Some advertising platforms, like Facebook, will allow you choose on your payment methods like CPC, CPM or CPA.

The big three payment models are CPC, CPM and CPA. So, how do you choose which one? I have a simple method for understanding it whether you are an advertiser or a publisher. This method comes down to risk. Both parties should try and optimize for the least amount of risk.

If risk was on a continuum graph it'd look like this:

At the CPM end of the continuum, the publisher is going to get paid based solely on how many eyeballs see the ad so the there is no risk for the publisher. They get paid no matter what happens. The ad could be delivered to over 2M people that never click and the advertiser can't do anything about it because that is the agreement they signed up for. With CPC the risk is split down the middle. The advertiser gets value if a user clicks because they are now going to their site so some of the risk is passed onto the publisher. Then at the far right of the continuum, we have zero risk for the advertiser. They only pay for a conversions on their website.

continuum.png

One might think to themselves why don't all advertisers and publishers just try and stick to CPM and CPA respectively? The reason is that there are more factors, especially in today's online market. 

Here are some other risk factors to consider for both publishers and advertisers:

  • Publishers
    • How much traffic you have, maybe your asset is not your traffic quantity but your quality. Maybe you have built an audience that is very loyal and will take your recommendations seriously. In this case, you have a more valuable audience that you can try and earn a premium on for CPA based campaigns.
    • How engaged the users are on your website or app. Do they respond well to partner ads or recommendations you make? 
    • How relevant the advertisement is to the site or audience - does the advertisements you have on your site actually add value to the audience or are they just general ads you were able to strike up?
  • Advertisers
    • How confident are you in your advertisement and audience? If you have a winner combination then try and get the lowest CPM rate possible. Or at least test a few different payment models. For example, with Facebook, I've found that advertising on CPM gets you in front of the users more quickly and I was able to lower my CAC in the end vs. going with their CPA model.
    • Maybe conversions aren't the goal of your campaign and you want to get in front of a large audience with a general message?

To further illustrate my point on the risk factors and the costs associated with each agreement method see these numbers below here from a client of mine's advertising spend for one of their campaigns.

You can see the cost goes up at each point from CPM at $0.01, CPC at $0.20 and CPA at $0.89 - this embodies the risk and value add relationship between how ad agreements are setup between publisher and advertiser. In this specific case we were advertising on Facebook in their CPM payment model.

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Glossary

CPC - Cost Per Click

Formula for CPC = Cost / Clicks

CPM - Cost Per Mile

Formula for CPM = ( Cost / Impressions ) * 1,000

CPA - Cost Per Acquisition

Formula for CPA = Cost / Conversions

CPL - Cost Per Lead

Formula for CPL = Cost / Lead

CAC - Customer Acquisition Cost

Formula for CAC = Cost / Customers