February 24, 2014 Last Updated 12:50 pm

Digitally Marketing: Simple math explains low CPM’s for publishers

Your display and mobile ad CPM’s are driven more by the acquisition cost advertisers are willing to pay for customers and less by the large supply of inventory available to them on the web. And, simple mathematics say the price advertisers can pay are pretty low.

CPH-Plaza-150-feature

Troy McConnell

Over the last 5 years, magazine publishers have been plagued by the dramatic loss of print advertising revenues which have not been replaced by web (and mobile) advertising revenues. Web and mobile advertising is said to pay much less per reader than print advertising. This may be true, but why is it so? It’s the same people, for the most part, reading your content.  They have just moved from print to desktop to laptop to tablet to smartphone. Why are advertisers paying you less now for the same audience than 10 years ago?

Mostly, I hear that this is an issue of supply and demand. There are so many websites generating ad impressions that it is driving the price down. The same is true of other commodities like corn, aluminum or oil. My problem with that analogy is it assumes all ad impressions are equally valuable regardless of the content with which they appear.  My opinion is that the success of Google’s Adsense program demonstrates that content context should (and does) matter to advertisers.

What could be other reasons? The truth is that it’s just easier to measure performance online (mobile and desktop) and the simple math behind conversions is driving low CPM prices.  This IAB report from last year says that about 2/3rds of the ad online market uses performance pricing where advertisers pay on a per-click or per-conversion basis. An advertiser using performance pricing calculates what they are willing to pay for online advertising as follows:

CPM Price = 1,000 * Click-through-rate on ads * Conversion Rate (on a click) * Marketing cost they are willing to pay for 1 customer.

where

  • CPM Price is the price paid to advertise.
  • Click-through-rate on ads is the rate that customers click on the ads (aka “CTR”).
  • Conversion rate (on a click) is exactly that. The rate that people who click actually convert into a customer.
  • Marketing cost is the acquisition cost defined by the advertiser and the product they are selling.
  • The 1,000 is just there because CPM is a price per thousand impressions. Otherwise, its just a distraction.

As an example, let’s say you get 1% conversion rate at your site selling tablet subscriptions, you are getting a 0.1% CTR and you are willing to pay $5 per customer. The price you are willing to pay is:

1,000 * 0.001 (CTR) * 0.01 (Conversion Rate) * 5 (Acquisition cost) = 0.05.

You should be willing to pay no more than $0.05 CPM price for online advertising.  If you show that example to your VP, Digital Advertising Sales, I would suggest you get out of the way of whatever she throws at you.

Certainly, that has to be a worst case, right? A quick search found that average online ad CTR’s are about 0.15%. If I plug that into my calculation but vary the acquisition costs and conversion rates, I get the below chart.

Conversion-Rates-and-CPM-Prices

The blue line represents the CPM a marketer would pay if their conversion rate was 1% as their acquisition cost grows from $0 to $50. The $0.75 value at the end is the CPM price that marketer would pay at 1% conversion rate and $50 acquisition cost.  It’s not until you find marketers that achieve conversion rates of 5%+ and are willing to pay acquisition costs of $50+ do you find CPM’s that are more than $4.00.  Perhaps this explains why the advertiser most frequently reaching me online is selling a mortgage refinance service.

In any case, I think it helps explain why your blended CPM on ad sales is about $2.00. It’s not ad exchanges. It’s not oversupply. It’s a simple case of marketer math.

Troy McConnell is CEO at AudienceFUEL.

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