Basic Formulas in Internet Advertising
It’s true mathematics never leave you and so not even in an online industry it has spared you, so let’s have some clear picture with examples of the formulas used in the online world so that you know well how things are working in online advertising industries ..(formulas in internet advertising)
- CPM CALCULATION :
cost per mille (1000) – This is one of the most used metrics on the web. It is the cost that has to be paid by an advertiser for serving 1000 impressions.
Example: In a campaign, say an Ad of 728×90 is running and the CPM set is $5 and the impressions to be served is 2,00,000, what will be the actual cost to the advertiser?
The formula for CPM goes this way :
using the above metrics :
Cost to an Advertiser= 5 x (2,00,000/1000) = 1000
So, $ 1000 is what the advertiser has to pay!
When CPM needs to be calculated: use the final cost.
- CPC CALCULATION :
As we know we have different rate models in online advertising, CPC – cost per click is one of the popular and well known used metrics. Here the advertiser has to pay as per clicks and not on impressions. The page views can be any number, as the advertiser is concerned about clicks here.
Example: Suppose a campaign having 300×250 size banner running at CPC of $2 and the number of clicks the Ad has got is 1000, what is the amount that the advertiser has to pay actually?
The formula for CPC goes as below :
using the above metrics,
Cost to an Advertiser = 2 x 1000 = 2000
So, $ 2000 is what the advertiser has to pay!
Also , Cost = Impressions * CTR * CPC.
- CTR CALCULATION :
CTR is click through rate, it measures the effectiveness of any advertisement. It is calculated by using a simple formula as below :
Example: A campaign having 728×90 Ad has served 10,000 impressions and has generated 100 clicks so what will be CTR of that Ad?
using above metrics ,
CTR = (100/10000) x 100 = 1 %
1% CTR means on every 100 impression there is one click.
- CR CALCULATION :
CR is conversion rate, to calculate the conversion rate a simple formula is used :
so if the number of conversions made is 20 in 1000 impressions, the conversion rate will be (20/1000)*100 = 2 %
- CPA CALCULATION :
Another metric that we have and is generally used is cost per acquisition which is irrespective of impressions and clicks both. This metric deals with any action or basically when something is acquired like user sign up or when any sale is made.
Cost to an advertiser = CPA x ( Impression x CTR X CR )
Suppose CPA is $ 5, the number of impressions is 10,000, CTR is 3% and CR is 2%.
using the above metrics,
Similarly, if you know the actual cost, we can easily calculate the CPA for the Ad using the below formula :
Some more formulas that are used :
CPL / CR = CPA or
Cost Per Lead divided by Conversion Rate = Cost Per Acquisition
VPA – CPA = NP or
Value Per Acquisition minus Cost Per Acquisition equals Net Profit.
- CPV CALCULATION :
CPV is the cost per visit which is new with respect to CPM, CPC, and CPA but is now commonly used by companies. The costing is done as per the actual visits.
Suppose, the total cost is $1000 and the visit increased from 50 to 250 visits so the incremental visit is equal to 200.
Applying the above numbers in the CPV formula, we get
CPV = 1000/200 = $5
i.e. Each visit cost is $5 to the advertiser
- eCPM CALCULATION : (Effective cost per mile)
Effective CPM is the actual CPM that is being applied, If the CPM set is $2 and the eCPM is $ 1.5, the net profit is $ 0.5. eCPM helps you measure how well your ads are performing. It is calculated by dividing total earnings/total spend by total number of impressions in thousands.
Example: An ad size of 728 has delivered 213456 impressions and has also spent some $300 with CPM set at $1.5, what will be the eCPM?
Using the formula,
eCPM = ( 300 / 213456 ) x 1000 = $1.40
We can also calculate eCPM using eCPC, but for that, we need to know the conversion rate. and then using the formula as below :
- eCPC CALCULATION :
eCPC is a metric used by Internet marketers to calculate the effectiveness of their online campaigns when the rate model used is CPC. eCPC can also be termed as ” profitable per click” so if the actual CPC is $2 and the eCPC is coming as $1 per click, then $1 is the profit on each click.
Example : If eCPC needs to be calculated for a single Ad size say 300×250, we just need to figure out how much the Ad size has spent and how much clicks it has generated, so if it is like $200 has been spent and the clicks generated are 100 with actual CPC set to $3 .
using the formula,
eCPC = ( 200 / 100 ) = $ 2
So , net profit = ( 3 – 2 ) = $1.
- eCPA CALCULATION :
eCPA is the effective cost per Action which is calculated the same as eCPC and eCPM, It is the total spend by the total number of actions(i.e conversions) acquired.
Example: The total spent on the campaign is $2000 and the total number of conversions made is 200, what will be the eCPA?
Formula of eCPA ,
Using the above metrics ,
eCPA = 2000 / 200 = $ 10
- Estimated LTV (LifeTime value) of a user:
eLTV = Avg. Purchase per Year * Avg. Purchase Size * Loyalty Duration in Years
- Estimated CAC (Customer Acquisition Cost):
eCAC = Time & Money Cost of Acquition / Number of Customers Acquired