MattMaroon.com

I’ve been talking to some people a bit about the internet advertising industry lately, and it’s occurred to me that many people even in the web industry have little or no understanding of how it works. To save myself the time of repeating it to each, because a lot of people may find it interesting, and because some of the topics I’ll be covering here in the very near future relate to it, I thought I’d write up a quick primer on the various terms, how they’re defined, and what they mean in practice.

Here are the basic terms, in logical order rather than alphabetical:

Ad Terms

Impression: This is what one view of one ad is called. Every time you see an ad anywhere, that’s one impression. A webpage with multiple banners might serve up one impression each for many different ads.

Publisher: The website displaying ads. The term is a holdover from the days of print marketing, but probably could use some updating nowadays. It’s a pretty big stretch to call the authors of most blogs or a social network "publishers".

CPM: Cost per 1,000 impressions (M being the Roman Numeral for 1,000). This is the amount a publisher gets paid to serve up 1,000 ads. For instance, I might purchase 1,000,000 impressions (1,000 times 1,000) of an ad on Facebook for 12 cents CPM, so my total bill would be 1,000 * .12, or $120.

CPC: Cost per click. Many ads are paid for only when someone actually clicks them, regardless of how many impressions are shown. This is very typical for ads on Google, Facebook, Myspace, and many other platforms. So if I pay Facebook 30 cents CPC to run my ad, and only one person clicks it, then it doesn’t matter whether they showed it once or one million times to get that one click, I still pay exactly 30 cents.

CTR: Clickthrough rate. The number of impressions of an ad that are clicked on by the viewer divided by the total number of impressions of that ad shown. If Facebook shows my ad 100 times, and 3 people click on it, that’s a CTR of

3/100 = .03

This is also sometimes expressed as a percentage (which in the above case would be 3%) but if so will need to be converted to a decimal for calculating eCPM, which I’ll get to after…

CPA: Cost per action. This is the amount of money an advertiser pays a publisher to drive one user who performs a certain action. For instance, suppose Netflix pays publishers $20 every time an ad banner on the publisher’s site gets Netflix one new member who signs up for a monthly service plan. Netflix is paying $20 CPA.

What constitutes an action is generally determined in advance by the advertiser, and in most cases involves a user purchasing something. (There’s also a similar method called CPL, or cost per lead, which I’ll ignore since it works about the same way but usually doesn’t necessitate a purchase.) This is a very common method of marking online through affiliate programs.

eCPM: The effective cost per 1,000 impressions. This is a useful metric when estimating the cost to run ads paid for by the CPC or CPA method rather than CPM. The formula for calculating it is:

eCPM = CPC * CTR * 1,000

or

eCPM = CPA * CTR * 1,000

So let’s say I’m paying Facebook 30 cents CPC, and I get a clickthrough rate of 1%, then I am effectively paying Facebook

$.30 * 0.01 * 1,000 = $3

eCPA: Effective cost per action. The effective amount an advertiser purchasing ads by any method other than CPA (for instance by CPC or CPM) pays for one action.

Ramifications

For publishers everything comes down to eCPM, for advertisers it all comes down to eCPA. Once you understand those two simple rules, the rest flows naturally.

Publishers have limited inventory (i.e. impressions) and want to maximize their profit, and the way to do that is to run the ads with the highest eCPMs. Even if the advertiser is paying by the CPC method, the smart publisher is automatically calculating which ads are paying the highest eCPM (which, remember, is CPC * CTR * 1,000) and displaying them first. (The same applies to CPA, but I’m going to continue just using CPC in my examples both for clarity and because it’s considerably more common among major ad platforms.)

Advertisers are all about maximizing the productivity of their ad budget. They seek to allocate their funds to the places that have the lowest eCPA. If that eCPA is less than the profit they make from the acquired customer, they’re making money. If not, they’re going to end up poorer.

So regardless of the tracking method used, every intelligent advertiser is looking at their eCPA, and every intelligent publisher their eCPM. This is why when I see ludicrous articles like this one about how we should stop using the CPM method (oddly by someone who formerly ran the Interactive Advertising Bureau and should know better) I laugh because the payment method is entirely irrelevant. It all boils down to the same thing in the end.

As an advertiser bidding by the CPC method, there are therefore a couple things you can do to maximize your profit. For one, you can pay more. If you double your CPC bid, you’re doubling the eCPM you’re paying the publishers, and therefore your ad will be significantly more likely to run. If your profit margin drops to half of what it was, but your volume quadruples, you come out a winner.

But since no advertiser is ever in a hurry to pay twice as much when there are other options available, it’s usually more common to focus on improving the CTR. Double your clickthrough rate and you’re paying the ad network twice the eCPM, however you’re still paying the same amount per click, while only using up half as much of the advertiser’s inventory. It’s a win-win for the advertiser and the network, which is why you’ll find a lot of helpful tips on the networks’ sites (and even frequently get contacts from staffers) on how to improve your CTR.

There are two very good ways to increase your CTR. One is to make your ad more appealing. Experiment with different images, sizes, and texts. This is both art and science, and time-intensive to boot, but it’s a powerful way to maximize your return on investment. If you are purchasing sufficient volume you can multivariate test the results of different ad texts pretty quickly.

Another common method of improving CTR is to improve your targeting. With search-based ads, such as those found on Google, find the keywords that convert best and most cheaply. On Facebook or Myspace, target users who fit your desired demographics and interests, and tailor your ads specifically toward the keywords being targeted.

So there you go. You now know everything you really need to know about how internet advertising functions at a basic level. There of course are thousands of little tips and tricks that people have collected over the years, some of which they’ve shared, many they’ve probably not. I’d recommend searching around for all of the advice you can find and then figuring out the rest through trial and error.

This entry was posted on October 19, 2009 at 4:00 pm and is filed under tech . You can follow any responses to this entry through the RSS 2.0 feed Both comments and pings are currently closed.