To begin with, cost per mille (CPM) is the cost of serving every 1,000 ad impressions that advertisers are willing to pay. Using this metric, advertisers are able to allocate their ad budget wisely and calculate how much they need to spend to reach a certain number of impressions.
On the other hand, eCPM is used by publishers to estimate the predicted revenue they can generate for every 1,000 ad impressions sold from their ad inventory. The reason for using two different metrics is that various factors, like pricing models (CPC, CPA, etc.), ad formats, and ad intermediaries affect revenue levels on the publisher’s side. However, CPM is purely based on the number of impressions, whereas the eCPM model takes into account different forces that affect an ad campaign to provide a combined average of the potential revenue levels. Hence, these two models cannot be used interchangeably but should be used together for comparing revenues and selecting the most profitable ad inventory.
The formula to calculate effective cost per mille (eCPM) is as follows:
eCPM = (Total Ad Revenue Earnings / Total Impressions) x 1,000
For instance, if a publisher made a total of $500 ad revenue earnings in a day and the app gained 100,000 impressions/day,
The eCPM should be: ($500/100,000) x 1,000 = $5.
eCPM and CPM can be confusing, so let’s see an example of how they are used between advertisers and publishers.
There are two advertisers bidding on the same ad impression and both offer a CPM of $3. However, one of the advertiser’s eCPM is higher than the other due to a higher click-through rate (CTR). Hence, the publisher decides to sell the impression to the more profitable one.
A publisher is selling a total of 4M ad impressions. The first 2M were sold to one advertiser at a CPM price of $2, the other 2M were sold to another advertiser at a CPM price of $1, and the remaining 1M impressions were left unsold.
The total ad revenue generated would be: [(2M/$2) x 1,000] + [(2M/$1) x 1,000] = $1,000 + $2,000 = $3,000.
We can divide this number to the number of impressions sold to calculate the eCPM, which would be: ($3,000/4M) x 1,000 = $0.75.
Hence, only the impressions that were sold are considered in the calculation, and for every 1,000 impressions, the published earned an average of $0.75.
The ad delivery process involves various factors that can create a discrepancy between the advertiser’s cost and the publisher’s revenue.
For example, let’s say an ad exchange connected an advertiser with a publisher’s ad inventory. The advertiser wishes to pay $2,000 for 1M impressions, leading to a CPM price of ($2,000/1M) x 1,000 = $2.
However, the ad exchange charges a 10% service fee, from the advertiser’s total cost, which would be $200 in this case.
As a result, instead of receiving the full $2,000 (CPM of $2), the publisher would be getting a $1,800 total revenue or ($1,800/1M) X 1,000 = $1.8 of eCPM.
Using the eCPM model, publishers can compare various metrics, like the performance of different ad impressions, apps, and pages. By calculating the eCPM of two apps, publishers can see which one is better performing and generating higher revenue. In turn, they can refer to the high-performing apps to make improvements on the other ones and ensure that the most profitable sources are leveraged.
eCPM is calculated based on data that is collected over time within months, years, etc. These calculations allow publishers to see the general revenue trend and any anomalies or contextual changes that occurred. Based on the analysis, publishers can make changes accordingly, making sure that they invest in ad impressions that are most suitable to the context and show long-term growth potential.
eCPM provides a dynamic measurement of ad costs by taking into account multiple forces that affect the ad delivery process. It can also work with various pricing models like CPA, CPC, and CPM, which is extremely useful as each advertiser uses different monetization strategies and impression counts for measuring ad performances. As a result, eCPM serves as a universal indicator today, and its flexibility allows publishers to accurately convert varying metrics and cross-reference them with a unified standard.
There are multiple factors that affect eCPM, and publishers should continuously update their knowledge and resources to find the golden ratio.