Effective cost per mille (eCPM)

What is eCPM?

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.

How to calculate eCPM

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.

Example of eCPM & CPM in use

eCPM and CPM can be confusing, so let’s see an example of how they are used between advertisers and publishers.

Example 1: Determining the most profitable CPM bids

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.

Example 2: Calculating average revenue between transactions

A publisher is selling a total of 4M ad impressions. The first 2M were sold to one advertiser at a CPM price of $2 and the other 2M were sold to another advertiser at a CPM price of $1.

The total ad revenue generated would be: 2M x ($2/1,000) + 2M x ($1/1,000) = $4,000 + $2,000 = $6,000.

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.

Example 3: External factors affecting revenue

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.

Benefits of eCPM model

Comparing prices & optimizing revenue for publishers

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.

Making contextual changes based on trends

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.

Flexibility with different pricing models

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.

Factors that affect eCPM

There are multiple factors that affect eCPM, and publishers should continuously update their knowledge and resources to find the golden ratio.

• Ad placement: Placing ad units on the top of the page or in an area that is easily noticeable is crucial for generating more impressions. Publishers can use A/B testing to figure out the most optimal placement for their apps.
• Ad format: Different ad formats bring different impression counts, as the level of engagement differs. For instance, video ads are more effective than static ads, but they are more expensive. Depending on the brand/product and message, publishers should consider the most appealing ad format.
• Contextual information: Factors like seasonality, or special holidays certainly affect ad performances as more traffic in generated during these occasions. At the same time, the competition for ad units is much higher, so publishers should plan accordingly and leverage these opportunities.
• ‍eCPM floor prices: An eCPM floor price is the minimum CPM bid an advertiser has to place in order to serve their ad on the publisher’s app. During special occasions like Black Friday, when bid competitions spike, publishers can raise the floor price to ensure they maximize profit. They can consider other holidays or events to regularly update their floor price and draw the most profitable bids.