Do you ever wonder what CPM, CPC, ROR, and COA actually mean, let alone how they can influence your online advertising? Let’s look at the most popular metrics, and how they enhance your understanding of your digital advertising spend and make you a more effective advertiser.
CPM — Cost Per Thousand
A simple metric, it refers to the cost of not one, but one thousand impressions of an advertisement. Some ad channels sell ad space on the basis of how many eyes will be seeing your Ads. This provides a flat fee structure that may be preferable over a cost per click (CPC) campaign, which could vary greatly depending on user action. The simple calculation for this metric is:
This acronym can be expanded into other “cost per” metrics, by looking at a desired outcome, rather than impressions.
- CPC – Cost per Click
- CPL – Cost per Lead, qualified lead from your media
- CPS – Cost per Sale, qualified sale from online media lead
ROR — Rate of Return
Looking a little deeper at an advertisement, we can evaluate the rate of return similar to an investment. To do this, we need to have a pretty accurate metric on sales or revenue generated from the ad. Using digital media, we have some simple tools like analytics or Web statistics that can help us gather these numbers. A simple way of looking at this calculation is the net revenue for that ad period, minus the cost of the ad over that same cost, typically expressed as a percentage, ex. 5%.
COA — Cost of Acquisition
As it states, this metric is calculated by the taking the total cost of he advertising spent, over the number of actual customers received from that spend. The accuracy of this metric depends on how clearly you can track your users and purchases online, just like ROR, and understand their “funnel” that got them to your shopping cart. The benefit of this over ROR, is that it does not look at the revenue, but plays an averaging role by looking at the number of carts, or purchases rather than the profit from the carts.
Putting it All Together
Knowing these few simple calculations can help you make more educated estimates on the effectiveness of your online marketing. Let’s look at this scenario of Tim’s Basketball Store:
Tim is spending 500.00 dollars a month on online advertising, half on banners and half in email marketing. He gets monthly reports from both with the clicks and purchases from each channel from his Web statistics. Here are his results…
Now we can look at both CPM and CPC for each by looking at the cost of the different ads over the number of impressions and clicks.
|5000/1000 = 5 250.00/5 = 50.00||250.00/435 = .057|
|Banners||15000/1000 = 15 250.00/15 = 16.66||250/197 = 1.26|
Email is more expensive in the CPM department, but the clicks are almost half the cost compared to the banners. And if we tied that in with some more data from the web analytics applications, we can see how many of those clicks turned into sales from the site.
|10||682.00||(682.00 – 250.00) / 250.00 = 172%||250.00/10 = 25.00|
|Medium||15||268.00||(268.00 – 250.00) / 250.00 = 7%||250/15 = 16.66|
So, in looking at these equations, we can see that email is providing some fantastic ROR for its cost. Turing almost a 200% return on its investment. That could be a clear indication of a channel that should be invested in more. But as with any metric, it should be looked at across a larger span than just one month. As in our example, banners had more purchases, but lower total revenue, which could point to some high priced sales with could be out of the ordinary or above average.
Banners turned a great CPA of 16.66 per cart checkout. This shows that based on the money spent, banners were the most efficient this month at getting customers to the site and into the sales column. Further analysis could look at the banner messaging, time of day, and referring site.
By looking at our data, we can see a true picture of the performance of our online advertising. In part two of this post, we’ll look at long-term evaluation of these metrics as well as not so traditional metrics for social media.
- Know a few key metrics to evaluate all your online ad spending.
- Use web analytics to track transactions to see deeper into your success.
- Look at them over short and long intervals to understand the value.