Is CPC or CPM Advertising the Better Value?

Just yesterday I had a prospective client hit me with a question I have been working on myself lately. He has a client who wants to know how much she can earn from her website for advertising once they reach their traffic goals. She wants to charge advertisers directly for impression ads. I explained to him that providing an exact figure is impossible. This he knew. Still, he pressed me for something reasonable he could deliver to his client. I told him I would get back to him in a few hours.

By C J Oakes

There is Nothing Like Beating a Deadline to Get the Creative Juices Flowing. Using Averages to Solve the Problem.

As mentioned, I have been working on this problem for some time. Everything I have learned about the Internet in the past decade leads me to one conclusion: Everything is measured so everything can be predicted. Everything? Yep. Everything…in averages.

The Law of Averages
The Law of Averages as a sales concept which states that on average, the worst sales rep will close a sale at a rate of 10%. In other words, for every 10 people the rep demos, one sale will be made even if the rep does nothing other than show the product. In fact, this law is used in many areas of sales and it can be applied to the Internet, though with a few modifications.

Average Conversion Rates and Converting CPC to CPM

We know that the average conversion rate for any website advertisement, whether direct sales, pay-per-click, newsletter sign-up, or whatever is 2.35%. Some are on the high end with up to 7% conversions (Amazon, Zappos, and similar online gorillas) and others are on the low end, usually, sites that do not spend much time optimizing for conversions. For sake of argument, let us assume the low end at 2% average conversion rate.

Now, to solve the problem of calculating within a reasonable range how much a website owner can expect to earn from or charge for advertising on their website using impression ads, we need to convert approximate earnings from CPC advertising to CPM rates.

CPC, PPC, and CPM
Note: CPC is Cost-per-Click, CPM is Cost-per-Thousand impressions. Another term used for CPC is PPC, or Pay-per-click. For this article, we will use the more proper term CPC. 

In order to convert CPC into CPM rates, we must first calculate how much CPC will cost an advertiser in terms of every 1000 impressions. Although this will vary wildly over products and services, we can devise a formula using one. After this, we can convert any others as we like.

To do this, we will use the average CPC rates found in Google Adwords.

For this example, I will use one of the most costly and prolific kinds of advertising, Life Insurance. Most CPC advertising bids on Google Adwords appear to be between $1.00 to $4.00. This means that the businesses bidding are only willing to pay within that range for the ads they run. These figures are constantly changing, but in general, they stay within a certain range. Life Insurance companies, by contrast, pay up to $29.00 for a single click. Credit card companies pay up to $24.00 per click.

Now, think about that. At a 2% conversion rate, it takes 50 views to get a single click. Then, the visitors to their website must be converted. If we assume 2% conversion, a company must get how many total views to obtain a new customer?

50 views x 2% = 1 click

50 clicks x 2% = 1 sale

At a 2% conversion, if every click is worth just $1, the acquisition cost = $50.00

Thus, if an advertiser it paying $25.00 per click, which appears about normal for Life Insurance companies, the cost to obtain one customer is $1250.

 

Here are the Formulas

To find how many clicks are needed for one acquisition: 100/conversion rate as a whole number (A)

 To find out how many clicks are then needed for a sale do the same (B)

Multiply these two figures (A X B) to get total needed impressions(C)

To find the ratio needed to complete the calculation divide C by 1000 (D)

Multiply the CPC by total clicks

That is how much it costs if 2500 people see the ad (50 X 50). To find the rate such a company should be willing to pay for an impression ad therefore, just divide $1250 by 2.5 (2500/1000). This means that it would not be improbable for an insurance company to be willing to spend $500 per 1000 views a website gets. The cost is the same. The only real difference is that no action takes place.

To rectify this, it would be a good idea when pitching a company to make the ad clickable. Thus, they can also gauge their ROI for the ad. The law of averages says they will either break even or come out better off.

Which is the Better Value? CPC or CPM Advertising?

Value is the ground between the cost of something and the rate of return. When it comes to advertising, the term ROI, or Return on Investment is used. However, this is only useful if a company keeps track of what they are spending. Most often, when a company uses CPC advertising, they do not think in terms of what the same ad would cost if it were calculated per 1000 views (CPM).

I know this because when I started my search for how to best determine the value of an impression ad, the only information I found dealt largely with traditional advertising.

But traditional advertising does not apply directly to the online world. I wanted to learn how impression ads would compare to the same cost per click ads and was unable to find information. So, I had to do my own math and determine my own formulas, which I have presented here.

My conclusion is that the better value lay in CPM ads, but most smaller advertisers cannot afford the generally higher costs for these ads. This is because most agencies which offer CPM advertising only does so with websites having in excess of 20K visits per month. Thus, the cost of their advertising is out of range for smaller advertisers, making CPC not only the better value but the only option.

The situation is like buying a car. If a person has $25,000 to spend on a new car, buying it outright is the best value. Most people do not have that laying around so they opt for monthly installments. In the end, they pay $10 to $20 more for the same vehicle, but they get it in increments they can afford. Advertising online is the same thing…CPC fits most budgets.

A Solution for Smaller Advertisers

My client set me on a new direction. After 25 years in sales and marketing, I became a writer. And I have been working tirelessly to find ways to better monetize my websites. In fact, there are many smaller publishers like myself who get 5-10K visitors to their websites but do not get enough to appease the large ad agencies.

So, I have a solution. I am going to help them while helping smaller advertisers.

If you have a website you would like to obtain a regular stream of advertising revenue to or would like to advertise with such a website, complete the following simple form or email me at CJOakes@OakesWriting.com.

We are working on a matching service and will help any who respond.

How Much Can a Small Website Obtain for Advertising?

Digital Advertising takes on three basic forms today, all of which may be incorporated if desired.

  1. PPC – pay per click is the most common form used for advertisers with smaller budgets. Over the long-term, the advertiser pays more but can pay in smaller increments much like buying a car with a monthly payment rather than buying it outright.
  2. CPA – cost per action is used most often with affiliate advertising and the right affiliate can be very profitable.
  3. CPM – cost per thousand provides the most direct source of revenue for a website and is the best value for an advertiser, but requires pitching the advertiser with more aggression.

A Combined Approach, using PPC, CPM, and CPA is Best

Many websites start with a PPC campaign using Google Adsense, Amazon Associates, Sovrn, or any other monetization company. This is fine when the site is starting up and has low traffic figures (less than 10K).

Locating viable CPA advertisers can be very good for certain niche websites. This is worth exploring from the start and in many cases continuing long-term.

Finally, once the site is generating enough traffic (1-10K visitors per month), perhaps pitch advertisers directly. Doing so can be time-consuming, but worth the effort.

A website generating 10K unique visits per month can obtain revenue in the range of between $12K and $20K per month if the advertising is handled wisely.

In general, if an advertiser is willing to spend $500 to get 1000 people to see their CPC ad, why wouldn’t they spend the same amount for clickable banner ads on a smaller site?

How Can You Locate and Cultivate Banner Advertisers for Your Small Website?

To sell advertising for the site, you are first going have to locate ideal prospects using a combined approach.

First, identify the most profitable advertisers using Google Adwords. This allows you to identify the most profitable products and services according to the current market rates. This is done by looking at what advertisers are spending already for niche market keywords (which means products and services).

Next, locate every viable website which is competing in the same market as your website. This is done by using sites such as Alexa to locate websites like yours or by using keywords that best identify your site in a search engine then noting the sites that are displayed. Another way to identify similar sites is to use SEMRush and SpyFu.

Then, gather information from a site like WhatRunsWhere, an advertising intel website which will tell you which companies are currently advertising with competitor websites in your niche.

Next, a site like AgencyCompile can help locate the agencies representing the advertisers.

Lastly, use SellerCrowd to gather intel which on the agencies for use when pitching the accounts.

Be sure to enter all data into a spreadsheet for quick reference purposes, keeping track of notes, and hyperlinking important numbers and sites to save time later. In addition, you can create formulas based on intel to determine the acceptable range of rates to pitch which will ensure that you neither sell an advertiser at too low a rate nor lose an advertiser because you over bid.

If You Need Help, Think of the James Taylor Song

Ok, so I am dating myself a bit, but here goes. James Taylor sang, “You just call out my name and you know wherever I am, I’ll come running…you’ve got a friend.”

Just give me a call at Oakes Writing. 337-660-4774, email me at CJOakes@OakesWriting.com or complete the following simple (and I mean really simple) form. I won’t really come running, but I will get back to you ASAP.

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