Basic Formulas : Digital / Internet Advertising

Mathematics is everywhere. Let it be a school life or our professional life. So, let’s try to understand the application of mathematics in internet world.

What is CPM?

The term CPM stands for Cost Per Mile which means cost per 1000. Its one of the most popular and used term in internet advertising space. This is the cost which advertiser pay to agency or publisher for publishing/serving 1000 impressions. Let’s take an example to understand it better.

Example:

Let’s assume that “Cadbury” wanted to run banner ad at CPM of INR 350 and wanted to serve 350000 impressions during the month time. What will be the total cost of client for this campaign?

Total Cost to Cadbury = CPM X (Impressions)/1.000)

So, Cost to advertiser will be = 350 X (3,50,000/1,000)

Total cost to advertiser will be = INR 1,22,500

Let’s have a quiz here…what will you find out CPM if impression and cost is given:

CPM = Cost to advertiser X 1000/Impressions

What is CPC?

Just like CPM, there are other popular models to calculate the cost in online advertising space. One of them is CPC model. CPC stands for Cost Per Click and as per the model, advertiser pays only when user clicks on the served impressions. For e.g. Cadbury has served 122500 impressions and only 50000 impressions got the clicks so in this case, advertiser will pay money only for 50000 clicks irrespective of number of impressions. Let’s explore by it an example.

Let’s assume that “Cadbury” wanted to run banner ad at CPC of INR 2 and wanted to serve 350000 impressions during the month time. The total clicks were 35000. What will be the total cost which Cadbury will pay?

Total Cost to Cadbury = CPC X No. of Clicks

So, Cost to advertiser will be = 2 X 35000

Total cost to advertiser will be = INR 70,000

But what if you need to find out the CPC when cost to advertiser and total no. of clicks are given? Apply following formula:

CPC = Cost to advertiser /Number of Clicks

CPC = 70,000/35000…Therefore CPC or Average CPC would be INR 2

What is CTR?

The term CTR stands for Click Through Rate. It indicates and measures effectiveness of any given campaign in internet world. It helps advertisers to understand and measures the effectiveness of campaign. It is expressed in Percentage.

For example: “Cadbury” has served 3,50,000 impressions and has got 35000 clicks. It’s simple…

CTR = (Total No of Clicks /Total Impressions) X 100

CTR = (35,000/3,50,000) X 100 = 10%...Therefore CTR rate is 10%

What is CR?

CR means conversion rate. It measures effectiveness of campaign in terms of absolute performance of campaign. Just like CTR, even CR is expressed in percentage.

CR = (Number of Conversions/Impressions) X 1000,

CR = (700/3,50,000) X 1000 = Conversion Rate is 2%

The above example demonstrate that Cadbury has sold 700 products by serving 3,50,000 impressions and the conversion rate was 2%. Remember conversion rate is second event, the first event is CTR which means that X % of people have clicked on impressions and out of which Y% Of sales event took place.

What is CPA?

CPA is another majorly used term in internet domain. it’s one of the most popular method used in internet advertising. CPA is basically Cost Per Acquisition. This method is applied to judge the actual acquisition of customer base or action initiated by user.

For e.g. Suppose CPA is INR 500, number of impressions Cadbury has served is 3,50,000, CTR is 3% and CR is 2%.

So, Cost to an advertiser = CPA X (Total Impressions X CTR X CR)

Cost to an advertiser = 500 X (3,50,000 X 3% X 2%) = INR 1,05,000

But what if you know the actual cost, how do you calculate the CPA for the campaign...?

CPA = Cost to an advertiser / (Total Impressions X CTR X CR)

So, CPA will be = 1,05,000 / (3,50,000 X 3% X 2%) = INR 500

Average Cost Per Click = INR 2 and

Conversion Rate is = 2%

What is eCPC?

Like eCPM, it’s a metric to compute the effectiveness of the online ad campaigns. Here the basic rate model used are CPC. Let’s assume that Cadbury has set INR 3 as CPC and actual eCPC delivered is INR 2, then INR 1 is actual profit. Basic formula here will be Profit = CPC -eCPC

For e.g. Cadbury has spent INR 1,22,500 and campaign has generated 61,250 clicks and actual CPC for campaign has been set as INR 4. So, what is the actual eCPC

eCPC = (Total spent or revenue / clicks)

= 122500/61250 = 2 whereas the actual CPC set is INR 4

So net profile is = Set CPC – Actual CPC = INR 4 – INR 2 = INR 2 Net Profit

What is eCPA?

The effective cost per action is calculated same as we calculated eCPC and eCPM. The idea is to calculate the effective cost of acquiring users or selling product online.

For e.g. Cadbury has spent INR 1,22,500 and generate 500 conversions. Let’s calculate eCPA for campaign.

eCPA = Total spent / number of conversions or actions

= 122500/500 = 245