Understanding the alphabet soup of how ads are bought, sold and measured.
Measurement might be the single most important aspect of advertising, especially in today’s data-driven era.
Measuring how many people saw an ad campaign and whether that exposure resulted in an increase in sales is necessary to understanding if a campaign was effective. More importantly, measurement helps advertisers understand why a campaign was or wasn’t effective, and those insights can be used to inform and refine subsequent campaigns.
Understanding the importance of measurement is easy. Brands spent a quarter of a trillion (with a “T”) dollars on media last year, and they want to know if that was money well spent.
Understanding the terms used to measure advertising is a different ordeal altogether, however. Advertising metrics are a complex alphabet soup of similar-sounding terms that have overlapping definitions. Which is why we’ve prepared this handy primer for you.
Let’s start with CPM. What’s that all about?
CPM is perhaps the most misunderstood term in all of advertising. CPM stands for “cost per mille,” meaning cost per thousand. In advertising, CPM determines how much an ad costs per 1,000 views or impressions. If a website is selling ad space for a $5 CPM, then a brand would need to pay $5 for every 1,000 people that visit that webpage and see the ad. If 10,000 people see it, the cost is $50. If 100,000 people see it, they have to pony up $500. You get it, you can do the math.
When is it used?
CPM is the most commonly used pricing method in digital advertising, and it’s typically used for brand campaigns — or when a brand is trying to drum up awareness among consumers.
Say a toothpaste brand is releasing a new line of toothpaste and wants to make consumers aware of its new product. It launches a brand campaign for the product, including buying a million impressions across a collection of websites at an average CPM of $20. The campaign would cost them, you guessed it, $20,000. Nice math, kid, you’ve got a future in this business.
Seems easy enough. How about CPA?
CPA stands for cost per acquisition, and it’s more precise than CPM.
Whereas CPM measures the sheer number of people who saw an ad, CPA measures how many people took a specific action that benefits the campaign (an acquisition). What is considered an acquisition measured depends on the unique goal of the campaign.
Hmm. Can you use an example?
Let’s say a sports apparel brand wants people to sign up for its quarterly email newsletter so it can keep them informed about its new clothing lines. The brand can run an email acquisition campaign on a sports news website offering people a 20 percent off coupon in exchange for submitting their email addresses.
Every email sign-up constitutes an acquisition in this case. Acquisitions can include a host of behaviors, though, including installing an app, acquiring social media followers or even inducing a consumer to buy a particular product.
How does the pricing differ?
Because it’s more precise, and because CPA measures a definitive action, CPA prices tend to be higher than CPMs.
Using the sports apparel example, someone signing up for a brand’s email newsletter is a clearer intent to buy than someone glossing over a banner ad while perusing a website. Some CPA campaigns are designed to measure actual sales of a product, which is the ultimate signal of effectiveness.
CPA ads are priced accordingly. The catch is the advertiser only pays when there’s an acquisition. So while a CPA model is more expensive, it’s also lower risk.
CPM seems like a waste compared to CPA. Why even use it?
Some people might agree with you, but both CPM and CPA campaigns have their rightful place in advertising.
Marketers often imagine the marketing process as an inverted funnel, with brand campaigns at the very top, and at the bottom is a consumer purchasing the item the brand has been advertising. The goal of advertising is to move consumers from the top (building awareness) to the bottom (eventually buying the product).
CPM campaigns are at the top, helping brands gain affinity with consumers on a general level.
CPA campaigns exist further down the funnel. An email acquisition campaign, like the one mentioned above, exists somewhere in the middle of this continuum. It doesn’t measure specific sales, but it does measure a consumer’s intent to buy. If the CPA campaign is designed to trigger actual sales, then it exists at the bottom of the funnel.
Are there any other pricing models?
There’s also gross ratings point, a measurement model that has been around since the 1950s and is primarily used for TV. GRP is a measurement, expressed as a single number, of advertising impact. It’s calculated by multiplying the percentage of the target market reached by exposure frequency.
You’re right. That sounds like an SAT question. Let’s go back to the sports apparel brand example from before to help us better understand.
The apparel brand wants to run a series of TV commercials in addition to its online email campaign. The target market is American females, ages 18 to 49, and the commercials run during a broadcast of the women’s Wimbledon final. Approximately 20 percent of women in that age range tune in to watch, and the brand runs four commercials throughout the broadcast. The percentage of the target market reached (20) multiplied by the number of exposures (4) equals a GRP of 80 in this case.
So what does that have to do with CPMs and CPAs?
We’ve arrived at the multi-billion dollar question.
CPM and CPA are geared toward digital advertising, and GRP is historically used for TV. But TV and the web are converging, so all these measurement methods are colliding.
Broadcast TV ratings are declining as consumers increasingly access TV content through digital mediums, such as smartphones, tablets and over-the-top devices like Apple TV and Roku. Advertisers can now use GRP to execute campaigns that include digital video ads, and use CPA and CPM for ads that appear on TVs.
This web-TV convergence thing sounds like a big deal.
It certainly is. It’s arguably the biggest development in modern media. Which is why we have a separate article all about the complex world of internet-enabled television.