How Much Does Online Advertising Cost? Understanding CPM, CPC, CPA and CPL

When a marketer begins working in online advertising, they are met with a blizzard of abbreviations that will take careful research and testing to fully understand.  After all, many marketers start with their own ad budget or that of a trusted client.   A lot is at stake.

Hopefully this article will alleviate some pain for your beginning days as a marketer. As you start with online advertising tools, you will invariably use Google's powerful AdWords program which allows you to implement four main strategies: advertise in Google's Search results, on a site that runs Google's search engine (known as "search partners"), on the Google Content Network (known as AdSense to web publishers) and, finally, you can placement target.

Let's say you decide to advertise on Google's search engine.  You are asked for keywords to target after inputting a text ad.  And, here, you're asked for a CPC. CPC means Cost Per Click, so now you want to figure out how much you want to pay every time a user clicks on your ad.  Depending on what Google suggests and your ad budget, your CPC can vary widely.

Now, let's say you've decided that you wanted to use Google's placement targeting capability.  Essentially, you will choose sites among Google's network of AdSense publishers who allow advertisers to select their site for display advertising. Placement targeting uses something called CPM pricing.  CPM means Cost Per Thousand impressions in this case.  As a marketer, you will likely have a goal for the number of impressions you want to receive for your ad budget which may also be determined by an expected clickthrough rate for your display ads.

In fact, CPM and CPC are very much related.  If you decide to pay a CPM of $1 for 1000 impressions and project a clickthrough rate of 1% (which equals 10 clicks), you are paying a 10 cent CPC. Make sense? The final type of advertising acronym we will discuss is commonly used by affiliate marketers and direct response marketers. It's called CPA advertising.  CPA stands for Cost Per Action or Acquisition and may also be known as CPL or Cost Per Lead.

For CPA, the marketer knows how much he or she is willing to spend for each action and earn a profit such as an ad program involving the sale of a bottle of vitamins. Using the CPA model, the marketer may have a $1000 ad budget to buy display advertising on Google's ad network and have a CPA of $25 - or expects to sell 40 bottles of vitamins.  Even though this is a CPA campaign, the $1000 ad budget may be used to buy CPM inventory such as 1 million impressions on a site with a CPM (Cost Per Thousand Impressions) of $1. 

To reiterate, though, it's still a CPA campaign to the marketer. If the marketer sells 50 bottles... great! Assuming the $1,000 budget, their CPA has been reduced to $20 and they are making more money than they expected. And if they sell just 10 units, they may want to try their next ad campaign somewhere else.

In the final analysis CPC, CPM, CPA and CPL are all related online advertising metrics used by marketers.

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