How Does CPM Ad Pricing Work?

The Internet offers myriad new ways to promote your business, and many entrepreneurs turn to online advertising as a portion of their marketing plan. If you plan to include new media advertising in your next campaign, it’s essential to understand how its pricing models work. CPM pricing is the pricing structure that closest resembles purchasing advertising space in traditional media.

CPM Pricing 101

CPM pricing is an abbreviation for cost per thousand, with the M standing for Latin’s word for a thousand, mil. In this model, banners or text ads are sold strictly on the basis of how many times a publication’s audience sees them. Advertisers purchase CPM ads on the basis of impressions, with each impression representing one time a website’s visitor sees an ad. Thus, if you purchase 60,000 ads on a CPM basis, expect your banner to be viewed 60,000 times – although not necessarily by 60,000 different people.

Calculating CPM Costs for a Purchase

Budgeting a CPM campaign is much easier than budgeting for a cost-per-click, or CPC, campaign. To calculate the number of impressions your purchase will generate, start by dividing the amount you budgeted for the purchase by the CPM cost, then multiply that number by 1,000. For example, if you spend $300 on a purchase with a $6 CPM, your ad will be viewed 50,000 times, or ($300/$6) x 1,000. Similarly, you may work backward, multiplying the size of your ad purchase, divided by 1,000, then multiplying it by the site’s CPM rate to determine the cost of the purchase.

Comparing CPM vs. CPC Campgains

After you make a CPM-based purchase, you apply advertising metrics to compare its performance to a CPC-based campaign. Advertisers provide information about click-through rates -- the percentage of viewers who saw the ad and clicked on it, usually known as CTR. To determine the number of clicks your campaign generated, multiply the number of impressions purchased by the CTR, expressed as a decimal -- a 2 percent CTR is 0.02, for example -- and divide the cost of the purchase by that figure to determine the associated cost-per-click of the ad. For example, if you spent $500 on a 90,000-impression campaign with a CTR of 3 percent, the buy was equivalent to a CPC purchase of about $0.19 CPC, or (90,000 x 0.03) / $500.

Comparing CPM Rates

As with all types of advertising, all websites’ audiences aren’t created equal, so comparing CPM rates between websites, or across media. While general-audience publications may be good for reaching a wide demographic base, they may not serve your campaign’s needs as well. Publications and websites with well-defined niche audiences may present readers who are more disposed to your product, making their advertising more valuable to you, which may be reflected in their CPMs.