The key part that the website publishers always look for, when aiming to run a profitable business is the ways by which they can generate revenue. A major source of revenue for the online businesses is through the advertisements that they get on their websites. At present, there are several advertising models and formulas. This article aims at providing the most important ad revenue formulas which can be used as your little hand guide for revenue calculations.
CPM – COST PER MILLE / COST PER THOUSAND
CPM is the most common online advertising model used by the website publishers. As the name suggests (Mille is Latin word for thousand), CPM model compensates the publishers for every 1000 views an advertisement receives. For creating the brand awareness over the need for immediate sales, the advertisers choose CPM model. CPM is calculated by dividing the total cost to the advertiser by the number of impressions received on the ad and multiplying the result with 1000.
CPM = (Cost to the Advertiser / No. of Impressions) x 1000
In another way,
Cost to the Advertiser = CPM x (Impressions/1000)
Example: Suppose an advertiser agrees to pay US $ 50 for certain ad campaign and the ad receives 50000 impressions. Then the cost per 1000 impression will come out to be (50/50000) x 1000 = US $1.
Thus the CPM that the advertiser agrees is $1.
CPC – COST PER CLICK
CPC is another advertising model that is used extensively. According to this model, the advertiser compensates the publishers whenever his ad is clicked. This means that no matter how many times the ads are viewed, the advertiser will only pay the publishers for the number of times it is clicked. CPC model is common among search engines like Google.
CPC is calculated by dividing the cost to the advertiser by the number of clicks received on the ad.
CPC= Cost to the Advertiser / Number of Clicks
The cost to the advertiser = CPC x Number of clicks received
Example: Let’s say you are running an advertisement campaign under the CPC model. You receive 100 clicks on the ad and the CPC is US $3. Then the total cost that you will receive from the advertiser will be 3 x 100 = US $300.00
CR- CONVERSION RATE
CR is an important term that you may need to consider during an ad campaign. It means the ratio of the number of positive conversions to the total number of clicks received on the ad. The positive conversion may be a situation that profits the company for which the ad was created like the product’s sale or subscription.
Why does a publisher need to know CR of a campaign?
It’s simple. If a specific website of yours has higher CRs, then you can switch to CPA/CPL pricing model on that website. This, in turn, boosts your revenue.
CR= (Number of positive conversions/ Number of clicks received) x 100
Example: If the total number of conversions is 25 out of 1000 ad impressions, the CR = 2.5%.
COST PER ACTION / ACQUISITION
This is another ad model that makes no consideration of the number of ad views or number of clicks but compensates the publisher for any positive customer action like the sale of the product or sign in of newsletter etc.
CPA can be found out by dividing the cost to the advertiser with the number of actions received on the ad.
CPA = Cost to the Advertiser / Number of Conversions.
It can also be computed by dividing the cost to the advertiser by the product of Number of impressions, Click through rate and Conversion rate.
CPA = Cost to an advertiser / (Number of ad impressions x CTR x CR)
Example: Suppose a certain ad campaign was viewed 5000 times, received 200 clicks and there were total 20 positive conversions. The total cost that the advertiser decides to pay is $200, Then the CPA can be calculated as:
CTR = (200/5000) x 100 = 4% 0r 0.04.
No. of positive conversions = 20
So, CR = (20/200) x 100 = 10% or 0.10
Total cost to the advertiser = $200
CPA = 200/20 = US $ 10
0r, CPA = 200/ (5000 x 0.04 x 0.10) = US $10
Also read: CPM vs CPC vs CPA vs CPI vs CPL
eCPM- Effective Cost per Mille
eCPM tells you the performance of your ads. It is found by dividing the total earning from an ad by the total number of impressions and multiplying the result by 1000.
eCPM = (Total earning from an ad / Total impressions) x 1000
Example: Let’s say that a company earns US $100 by an ad campaign and the total number of Impressions that the ad received is 10000. Then,
the eCPM = (100 / 10000) x 1000 = US $ 10
meaning that the company gets an earning of US $10 for every 1000 ad impressions.
Why should you calculate eCPM?
eCPM is a great metric to help the publishers in calculating and optimizing their ad campaign as it allows publishers to directly compare ad revenues across various platforms.
For example, if you see that a video ad on your website received 500 impressions and earned you $5 while a banner ad received 800 impressions and earned $3. You cannot evaluate the performance of both the ads directly but if you find the eCPM quickly, you will get to know that the video ad had an eCPM of $10 while banner ad has an eCPM of $3.75. Now you can directly conclude that the video ad is making you more money.
eCPC – Effective Cost Per Click
eCPC is a similar concept to that of eCPM with a difference that it takes into account the number of clicks received by the ad rather than 1000 ad impressions. Hence, eCPC calculates the earning made from an ad for every click that it gets.
eCPC = Total Earning from an ad / Total number of clicks received
eCPA – Effective Cost Per Action
Similar to eCPM and eCPC, eCPA calculates the effectiveness of CPA ad model. It is determined by dividing the total earnings generated by an ad campaign by the total number of actions taken on that ad.
eCPA = Total Earning from an ad / Total number of actions taken
ROI- Return on Investment
ROI is a very important term in the field of digital marketing. To know about the success of an ad campaign, it is necessary to analyze the overall profit gained out of it. ROI is calculated by subtracting the total campaign cost from the total ad revenue earned and dividing it by the total campaign cost.
ROI = (Total ad Revenue – Total ad campaign cost) / Total ad campaign cost
Example: Suppose a company spent US $500 on an ad campaign and earned a return of $1500 as the revenue. Then, the ROI = (1500 – 500) / 500 = 2. This is equal to 200% of the cost. Or in other words, for every 1 $ spent on the campaign, the company earned 2$ in return.