There are too many formulas in online advertising that you need to know in order to be successful in becoming an expert of digital marketing. But let’s assume that you are not aiming to be an internet marketing guru. You’ll still need to know some important online advertising formulas as long as you are directly involved with the digital media. No matter who you are – an entrepreneur, an aspiring digital marketing learner, an in-house social media manager, or may be a newbie online advertiser, you need to know at least the basic online advertising formulas in order to be successful in this field. To better manage your online marketing campaigns and to measure its success, keep these formulas handy.
10 Important Online Advertising Formulas
CTR – Click through Rate
If you’ve already run an online advertising campaign, there’s a good chance that you are familiar with the term “Click through Rate” or CTA. CTA is the ratio of clicks an ad receives to the number of times it was viewed by its audience. It is calculated by dividing the number of clicks by the number of views of a particular ad and multiplying the result with 100. CTR is usually used to measure the success of an online advert, such as a Facebook ad.
CTR = (Number of clicks / Number of views) X 100
So, what CTR is good? It is often said that 2% is good. But it depends on various factors, such as the type of content or product is being advertised, or the size of the market, or even the type of the audience that the ad was shown to. For one campaign 2% may be good enough, but for another, 2% may be a bit too low. Always remember that the higher the CTR can be, the better it is for the campaign’s overall performance.
Example: In a campaign, your ad was shown 2000 times to the audience and received 50 clicks to the landing page. The CTR is (50 / 2000) X 100 = 2.5% which seems to be not bad. But the higher it can be the more successful the campaign can be considered as.
CPM – Cost per Mille
CPM is the technical abbreviation of Cost per Mille. Mille is a Latin word for thousand. So, naturally CPM is also called the “Cost per Thousand Impression.” CPM is one of the most popular models of online advertising just like CPC and CPA. It’s mostly used for the creation of brand awareness. Many companies seeking brand awareness and exposure for a newly established brand are seen to be using this model.In terms of digital advertising, an impression takes place whenever an ad is shown to its audience regardless of whether the ad receives a click or not. Regardless of the number of clicks an ad gets, CPM simply considers the cost for every thousand times the ad was viewed by the people. CPM is calculated by dividing the cost to an advertiser by the number of impressions and multiplying the result with 1000.
CPM = (Cost to an Advertiser / Impression ) X 1000
Example: Suppose, an ad received 3500 impression. The advertiser decided to spend US$30.00 for the campaign. The cost for a thousand impression would be (30 / 3500) X 1000 = US$ 8.57 which means that the advertiser agreed to pay US$ 8.57 for every thousand views.
CPC – Cost per Click
Similar to CPM, CPC (Cost per Click) is another widely used model in online advertising. Upon choosing this model, the advertiser has to pay for each click instead of impression, meaning that no matter how many times an ad is viewed by its audience, the advertiser will have to pay only when it is clicked. The model is effective when the campaign’s goal is to get as many clicks as possible. For example, if you run a Google AdWord campaign for one of your products on Google’s search network using CPC model, every time a certain keyword is searched on Google, the ad will be displayed. But you’ll have to pay only when somebody clicks on it. Quite like CPM, you can calculate your CPC by dividing the cost to you (the advertiser) by the number of clicks. Here’s the formula:
CPC = Cost to and Advertiser / Number of clicks
Similarly, you can find the cost to the advertiser if you have the number of clicks and the CPC set for it.
Cost to an Advertiser = CPC X Number of clicks
Example: Suppose, you’re running an ad campaign for one of the Ebooks that you sell online. You chose the CPC model. How much would you have to disburse for the campaign? Consider the number of clicks and the amount you’d like to spend for each click. If the number of clicks you received is 50 and the CPC is US$2, the total cost to you is US$ 100.00 That’s how it works.
CR – Conversion Rate
If your online marketing campaign’s goal is only to generate revenue, conversion is the most important metric that you need to consider. Conversion may have many different meanings. But in terms of marketing, it is a phrase used to describe a situation where a customer takes a specific action that had positive and profitable impact on your business. In online advertising, a conversion rate is the ratio of conversion created by an ad on a website to the number of clicks the ad generated.
CR = ( Number of Conversion / Number of Clicks ) X 100
Example: Let’s assume that ABC company sells shoes through an electronic shop. It ran an ad campaign on Facebook and an ad received 250 clicks. The advertising was happy seeing the CTR. But much to his surprise, the number of conversion on the website was only 1 meaning that only 1 product was sold throughout the time the ad was live. The conversion rate is (10 / 250) X 100 = 4% which seems to be pretty low.
CPA – Cost Per Action/Acquisition
We’ve talked about specific actions in the previous section. Just like CPM and CPC, there is another model in online advertising, which is called CPA or Cost per Action (also called the Cost per Acquisition.) In case of CPA, an advertiser will only pay when a conversion takes place regardless of the number of impression an ad receives or the number of clicks it generates. For revenue generating businesses, CPA is of much importance. It is computed by dividing the cost to an advertiser by the number of actions taken. Another way to calculate CPA is dividing the cost to an advertiser by the number of impressions, then dividing the result by the click through rate and finally dividing the result by the conversion rate.
CPA = Cost to an Advertiser / Number of Conversion
CPA = Cost to an Advertiser / (Number of impression X CTR X CR)
Example: Suppose XYZ Inc. sells laptops through its website. It ran an online ad campaign where one ad promoting a newly arrived model of laptop was viewed 3000 times by the target audience, the number of clicks it received, however, is 150 and there was 15 conversions.
Number of impression = 3000
Number of Clicks = 150
CTR = ( 150 / 3000 ) X 100 = 5% or 0.05
Number of Conversions/Actions/Acquision = 15
CR = ( 15 / 150) X 100 = 10% or 0.10
If the total cost to the advertiser is US$ 100
So, CPA = 100 / 15 = US$ 6.66
CPA = 100 / (3000 X 0.05 X 0.10) = US$ 6.66
CPL – Cost Per Lead
Like CPC, CPM and CPA, CPL is also popular among marketers when the goal of the campaign is to generate leads. CPL is very similar to CPA with the exception of the goal of the campaign. In fact CPL is one type of CPA as conversion of a visitor into a lead is one kind of action being taken on the website. So similarly, the formula for CPL is:
CPL = Cost to the Advertiser / Number of Leads generated from the ad
eCPM – Effective Cost Per Mille
eCPM is an ad performance metric that determines the revenue generated from a thousand impression of a specific ad, unlike the actual CPM which determines the cost to the advertiser for a thousand impression of the same ad. It is also called RPM or Revenue per Mille. eCPM is calculated by dividing the revenue earned from an ad by the number of impression and multiplying the result with 1000.
eCPM = ( Total Earning / Total number of Impression ) X 1000
Example: Suppose a company generated US$ 50 in revenue from an ad and the total number of impression the ad received was 10000, the eCPM is (50/10000)X1000 = US$ 5 which means that for every thousand impressions, the company earned US$ 5 in revenue.
eCPC – Effective Cost Per Click
eCPC is the same as eCPM except for the fact that it considers a click generated by an ad rather than a thousand impressions. The goal of eCPC is to determine the revenue earned from an ad for every single click it received.
eCPC = Total Earning / Total number of Clicks
eCPA – Effective Cost Per Action
eCPA is another important metric to determine the total revenue generated by an ad for each action taken on the website. It’s used to calculate how effect a CPA campaign is. eCPA is calculated by diviting the total revenue earned from an ad by the total number of actions taken on the website.
eCPA = Total Earning / Total number of actions
ROI – Return on Investment
ROI stands for Return on Investment and is a very common term used by marketers around the world. To understand the success of a campaign or a business as a whole, it is very important to know the monetary benefit (in our case, the revenue) earned against the money invested to acquire it. ROI is calculated by subtracting the total cost from the total revenue generated and dividing the result by the total cost.
ROI = (Total Revenue – Total Cost) / Total Cost
Example: Here is an example of ROI. Suppose a eCommerce store has generated US$ 2000 from an online advertising campaign and disbursed US$ 500 on the campaign. The return on investment is (2000-500)/500 = US$ 3 which is 300% of the cost when converted into percentage. 300% return on investment is pretty high but it is also true that achieving a high ROI is not easy. We can state that for every dollar spent on the campaign, the business generated US$ 3.
LTV - Life Time Value (Added by Domingo Cordero)
LTV is all future projected average revenue for each conversion customer.
Cost per Click / Conversion Rate < Life Time Value
For example, if the LTV (Life Time Value) for ABC company is $500 and a CR (Conversion Rate) = 2%. We should not expense more than $10 CPC (Cost per Click) $10 / 2% =$500
* See well-made infographic how to calculate lifetime value created by kissmetrics
Conclusion:
It looks like mathematics will never leave us alone and will haunt us until the day we get old! When it comes to digital marketing, the statement is even more true. Formulas create meaning out of numbers. So stop running from your fear of numbers and learn these online advertising formulas to be more successful in the relevant sector.
