It puts a consistent payment rate on the amount of times the ad is distributed, whether online or through traditional media.
But the rate does not depend on whether the campaign produces clicks, leads or sales.
In traditional media, a CPM advertising campaign tracks the distribution of the ad to publish readers (magazines and newspapers ), travelers (outdoor billboards) and broadcast viewers or listeners (radio, network TV, cable TV).
In online media, it monitors the verifiable distribution and consumption of the ad.
Qualitative research, which relies upon the questions and answer surveys of a limited number of respondents, will gauge the size of a radio station or TV channel audience in total and during each time segment. The station will use that research to establish CPM rates because of its advertising.
Traditional CPM Example
A local TV channel receives survey results demonstrating that it has an estimated audience of 200,000 viewers.
The channel will sell a campaign to an advertiser that reaches 20,000 of those viewers with a commercial that airs during certain time periods. It charges the advertiser $500 for the ad campaign.
The CPM formula follows: $500 = (20,000 / 1,000) * $25.
It’s another way of saying that the station charges $25 for each block of 1,000 impressions. Because the advertiser bought 20 blocks, the cost is the $25 base rate times 20 blocks or $500.
The reason is that the distribution of this ad is based on study estimating the amount of viewers throughout the time intervals the advertiser bought. The actual number of viewers may be higher or lower.
Online CPM Example
The same numbers can be helpful in calculating an internet CPM example.
A Web site has 200,000 visitors every month based on verifiable third-party audience monitoring .
An advertiser want to reach 20,000 of those visitors over the course of a month or 10 percent of the total visitors.
The publisher sets up a campaign in which every visitor sees the ad two times. In this case, the CPM is $10.
Since 20,000 visitors will every see the ad , the total number of ad impressions is 40,000.
Since the CPM is $10, the whole cost is $400 or the $10 base rate for 40 blocks of 1,000 impressions apiece.
On the surface, the online campaign seems more valuable as it provides more impressions to the same audience size.
While the pricing model is the same, every distribution channel has distinct advantages and disadvantages that affect the true value of the CPMs.
Advantages of Online CPM Pricing
One reason for the popularity of online CPM advertising is that the viewership is quantifiable and verifiable. The viewership also is often more precisely targetable based on demographic and geographic data.
A site using ad serving software can track the display on an ad on a page and report that impression. The best ad serving software provides certified, third-party reports for the sake of credibility.
Software also can control the number of times the ad appears to a exceptional site visitor so that no 1 visitor will see the same ad too many times.
In traditional media, three impressions is a common standard, though some study in online advertising has shown that five to six impressions is ideal.
The downside to online CPM advertising is that many sites have more than 1 ad per page which compete for the customer’s attention. With traditional broadcasting, that ad has no competition. Viewers see only one dad. Listeners heard only one. However, newspapers frequently have more than 1 ad per page.
Proponents of online advertising might point out that it is far more of a captive audience than print or broadcast.
A newspaper reader might not even open the page with the ad.
An Internet surfer frequently sees the ad because he or she just clicked on a link to a page that comprises the ad. They are less likely to leave their computer at the moment they click on the link than a TV viewer during five minutes of commercials.
CPM Cost Factors
Even though the CPM pricing model began in traditional advertising, it has become the second most popular pricing model for Internet advertising after CPC or cost per click in part due to its efficacy, verifiable distribution, the ability to target and other factors.
Nielsen Research has reported lately the cost of CPM advertising on TV has hovered around $25 per thousand impressions. Some reports put online video advertising rates in precisely the exact same level. Numerous sources report radio rates as low as $4 and newspapers as high as $20 to $30. Other factors impacting price include competition, the size of the ad in print and the period of the commercial on broadcast.
The Internet Advertising Bureau reported that the average CPM for 100 sites in 2013 was $11.70. CPM rates vary greatly by class, i.e., health, travel and finance.
Factors which increase the average cost include geo targeting, section targeting and the type of display ad including:
- Static image
- Flash / animated
Salespeople representing all types of media compete for advertisers’ marketing budgets.
For large advertisers, budgets are divided up among multiple channels of distribution, such as broadcast, print and online.
Each station receives a portion based on its ability to deliver the most valuable audience with the fewest potential dollars. The following strategy considers audiences, costs, results and adjustments:
- Get as much information as possible about the target audiences for each available channel. Can they be targeted by zip code, sex or buying interests?
- Compare the CPMs one of the many channels and favor the lowest CPM to minimize the budget impact.
- Set a moderately short campaign program to test the effectiveness of each channel.
- Establish a value on the outcomes based on cost per acquisition, cost per lead, cost per transaction or a related metric. Adjust each campaign accordingly.
- It’s in the best interest of the advertiser to look at comparative CPM rates for all promotional channels.
But using a metric like cost per transaction will make it clear which channel generates the most valuable results.