CPA or CPM? That Is the Question

Like Hamlet, online marketers face a tough decision. Do you buy online media for branding power or purely for cost efficiency? Beyond the media buy, whether you use cost per action (CPA) or CPM has strategic implications.

Given online advertising’s measurability, both brand and response-centric marketers look at online spend in a strictly action-driven, promotional context. From this tactical perspective, they use online promotional budgets to generate leads or other actions that, like their offline equivalents, yield some branding. Yet the potential synergistic effect of smart spending can be overlooked.

According to Jason Heller, CEO of Mass Transit Interactive, a hybrid media model delivers the best results by building brand and purchase intent while selling.

CPM and CPA are complementary advertising buys that fill different needs. CPM brands, while CPA primarily drives response. CPM can also be used for direct marketing. (Remember, direct response doesn’t work for every product.)

“Typically, the blue-chip advertisers my firm works with almost always buy on a CPM basis,” said Paul DeBraccio, CEO of Interevco, “while lower-tier companies in the same categories generally rely on a CPA model.”

Strategic Perspective

Consider your marketing strategy’s media aspect. How do the following apply to your offering?

  • How do target customers use the Web? How does this relate to your offering? How does it fit into your overall strategy?

  • What are your marketing and advertising goals? Do you need to improve branding to build purchase intent, drive immediate response, or both? How will the Internet get you where you need to be?
  • How does your ad’s viewing environment reflect on and influence branding and purchase intent? Can your media buy scale? Broadly assess editorial direction, content, target audience, and other advertisers (in terms of product and quality).
  • How does creative, including copy, design, format, and landing pages, relate to the target customer and your marketing strategy?

Tactical Considerations

Publishers price ad impressions based on reader quality and demographics. Marketers usually advertise online to acquire customers and immediate sales, as measured by return on investment (ROI). For advertising to be effective, it must usually drive potential customers from ad to Web site to a required action’s completion.

The difference between CPM and CPA buys depends on who bears the risk for converting an impression into an acquisition. This is basically your yield (the product of CTR and conversion rate (CR)).

When publishers sell media on a CPM basis, they know how many page views are required to fulfill their obligation. When they sell media on a CPA basis, they don’t know in advance how many page views are needed. Many factors affecting yield (e.g., landing pages and conversion processes) are beyond their control. CPA-placement sellers generally charge a premium to accept the risk of your ad yield.

Using CPA-only deals can limit your options and potential universe, as not all publishers accept them. Choices are very limited, primarily to sites with lots of unsold inventory and low demand.

Consider:

  • Which sites efficiently contribute to your reach goals? Do they deliver quality customers? (If you don’t know the quality of customer derived from each combination of media placement and promotional campaign, you need a better marketing tracking system.)

  • How does media context interact with your ads? Is advertising integrated with content? Does this environment help increase purchase intent? Does the content complement your product (e.g., health for health products)? Should you develop and/or test new creative approaches?
  • Are the media cost effective in light of your strategic goals and key indicators? What’s your projected customer lifetime value?
  • Can the campaign’s effectiveness be improved by optimizing various factors, such as format, content, landing pages, and media placement, to get higher conversion rates and lower acquisition costs? Run different tests to determine which work best for your offering.

Analysis

Is a CPA or a CPM basis more cost efficient for your specific campaign? To find out, you must express CPMs and CPAs using consistent factors. Express CPMs in terms of acquisitions or CPAs in terms of impressions or CPMs (the industry standard). For today’s exercise, total advertising costs only include the media expense. Also, these formulas are useful if you buy only on a CPM basis but track acquisitions.

To calculate CPM:

Media CPM = [media spend/number of impressions] x 1,000

Now, express CPM in acquisitions. Since:

Impressions = number of acquisitions/[CTR x CR]

Then:

Media CPM = [media spend/[number of acquisitions/(CTR x CR)]] x 1,000

To calculate CPA:

Media CPA = media spend/number of acquisitions

Now, express CPA in impressions. Since:

Number of acquisitions = number of impressions x CTR x CR

Then:

Media CPA = media spend/[number of impressions x CTR x CR]

Sample Calculations

Use the following information to see how easy converting from one measurement to another is. Assume CTR and CR are known based on past experience:

  • Total media cost = $180.00

  • Impressions = 30,000
  • Media CPM = $6.00
  • Clicks = 600
  • CTR = 2.0 percent
  • Acquisitions = 200
  • CR = 33.3 percent
  • Media CPA = $0.90

To determine media CPM based on CPA and acquisition goals, first find impressions:

  1. 200/[2.0 percent x 33.3 percent]

  2. 200/[0.02 x 0.333]
  3. 200/0.00666
  4. 30,030

Then, plug the impressions into the CPM formula:

Media CPM = [$180.00/30,030] x 1,000 = $5.99 (differences due to rounding)

To determine to media CPA based on CPM and impressions, first find acquisitions::

  1. 30,000 x 2.0% x 33.3%

  2. 30,000 x 0.02 x 0.333
  3. 30,000 x 0.00666
  4. 199.8 (differences due to rounding)

Then, plug in the acquisitions into the CPA formula:

Media CPA = $180.00/199.8 = $0.90 (differences due to rounding)

You should pay more to advertise where your ad receives more attention and doesn’t suffer from viewer fatigue. As a result, fewer impressions are necessary to acquire better-performing customers. Myopic marketers may not consider the fact lower price can translate into less-productive media.

To truly understand your customer base’s dynamics, use fully loaded costs. A customer’s true lifetime value is based on its revenue streams minus the cost to acquire and maintain him. This varies by media source.

No matter how you purchase media, either CPM or CPA, you must manage customer acquisition on a CPA basis that includes all marketing costs to understand your ROI.

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