When do we need pay per click and when pay per impression?

When a context advertisement campaign begins, the problem of choosing the scheme of payment for traffic arises. The simplest and the most common decision is to pay per every click on the ad. The most of advertisers choose this very way – and win from this. But sometimes mass media gives possibility to cut expenses on advertisement campaign which gives a great result. The main thing is to understand when it is efficient and when it is not.  

The basic schemes of payment for traffic in Google AdWords are:

  1. CPC (cost per click) – pay per every click.
  2. CPM (cost per mille) – pay per every 1000 impressions.
  3. CPA (cost per action) – pay per target action (e.g. purchase or filling in a registration form).

Unlike the first two schemes, CPA has requirements to the campaigns where you are going to use it, and can’t be used from the beginning. For example, not less than 15 conversions within the given campaign are necessary. That’s why we will consider only the first two schemes.

CPC is used both in the search and in Google Display Network while CPM, as a Google AdWords enquiry says, “is not yet available” for the search and works only in Display Network. So, they compete only on advertising platform.

All ads at the auction are reduced to a common denominator – i.e. converted in one scheme and compete on the auction on the basis of the given rates. The basis (for Google AdWords) is the pay for 1000 impressions: all rates in CPC are multiplied by the ad conversion rate and by 1000. For example:

Let’s assume, there are 2 ads:

The first one uses CPM with the rate of 0.13 USD per 1000 impressions;

The second uses CPC with the rate of 0.09 USD per click.

Let’s assume their clickability is the same: CTR=0.17%

Then the second ad will participate in the auction at the price: 0.09*1000*0.17/100=0.15 USD per 1000 impressions.

If the ad is new and has not yet managed to gain its impressions and clicks, the system automatically assigns it some average CTR value from its statistics and then changes it to a really obtained value.

Besides, Google encourages using CPM. As the enquiry puts it:

“Text advertisements with pay per impressions have one unquestionable advantage: having won in an auction for the ad platform they occupy all ad space. There are no other text advertisements near them, which means that our ad has more chances to be noticed”.

Speaking of price advantages, we will have to turn to mathematics. If the example above indicates not nominal but real rates (i.e. those which an advertiser spends per click), then the first one obtains for 0.13 USD:

1000 * 0.17/100 = 1.7 visitors

And pays for each:

0.13/1.7 = 0.07 USD.

While his colleague spends 0.08 USD.

To understand the difference better: if every ad attracts 10000 visitors, the first advertiser will pay for them 700 USD and the second – 800. In the scale of some ad campaigns it can be critical.

So, CPM can be profitable if the ad is clickable enough. There is even a formula that helps determine the lowest value of CTR at which the pay per impressions is more economically beneficial, or the highest value of CPM at a known average rate per click and clickability.

If we consider it from quantitative point of view, i.e. count budget expenses for visitors, then the expenses of CPM ad campaign are calculated in the following way:

Expenses = CPM * Number of impressions / 1000

And by CPC:

Expenses = CPC * Number of clicks = CPC * Number of impressions * CTR/100

Thus, pure arithmetic says that the cost of attracting the same visitors is equal when:

CPC * Number of impressions * CTR / 100 = CPM * Number of impressions / 1000

Let us calculate CTR at which expenses will be equal. From the same formula:

CTR = (CPM / CPC)*100/1000 = 10 * CPM / CPC

If we have an ad campaign with CPC, we can easily calculate what price for impressions we can afford:

CPM = CPC * CTR /10

In the result we look at the figure we have obtained. If it is non-competitive and we will lose all impressions on the ad putting such rate – then the conversion is inexpedient. If there are doubts – it can be tested and checked. At this Google AdWords enquiry advices to start impressions from higher rates in order to get a good quality index and only then reduce their value to the level that you need.

The same enquiry recommends giving advertisement using cost per click first. In fact, using CPM for a new campaign is very risky: you don’t know what CTR your ads will have and you haven’t yet optimize them to be more or less sure that there will be conversions. The change of the system makes sense when the CTR is high and the ads are checked. On the other hand, if you have reached high indexes on the ad, users can get bored with it in time and its clickability will fall. And conversion to CPM will be irrational again.

But all this is just mathematics. In fact, situations can happen when an advertiser doesn’t need big number of conversions to the site and he places his ads and banners with the same aim as the banners are placed in the street or in the media: to become familiar, to acquaint people with the product, to be recognizable.

Also, whatever rosy the CPM perspectives may seem: lower pay, more profit, – often the rates enough for such results appear non-competitive and are not even accepted by the advertisement system.

You should keep in mind that, acting by the formula, converting the rate per click to the relevant rate per 1000 impressions and reducing it we automatically reduce the advertisement rating. In competition struggle it can be a bad option and a way to lose impressions.

Resume:

CPC benefits:

  • the most reliable. Traffic cost is easily calculated.
  • only physical visit to the site is paid for (a click is not always a visit)

CPM benefits:

  • the basis of auction rates.
  • if the ad wins by the rate, it occupies the whole ad block.
  • at high CTR it allows to get the same clicks for less money.

Speaking generally, CPC is the best for:

  • ads in a search network (where CPM can’t be used);
  • new ad campaigns;
  • ads with low attractiveness;
  • ads on advertisement and non-specialized portal;
  • sometimes for remarketing.

CPM will be good for:

  • ads on thematic blogs;
  • ads on profile sites;
  • in highly active groups of social networks (usually small groups);
  • image ad, aiming at promoting a certain brand and becoming familiar with the user;
  • for remarketing, if the resource appears not quite interesting and useful for the visitors (again, it is determined  by clickability of the remarketing ads);
  • for promotion of free portals, services, programs – as the very word increases the CTR of ads.

As a result, in order to find the best option for yourself you should, as always, test, check, calculate. Quite naturally, you should monitor the state of campaigns and individual ads, adapt to the current situation. When you get the statistics for the long period of time (several months, at least), you will be able to formulate your pricing strategy and determine if you need tests and monitoring or you better leave everything as it is.

Good luck!

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When do we need pay per click and when pay per impression?

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