Step 1 in the ROI process: Calculating Acquistion Costs

The New Integration: The Traditional Funnel me...

The New Integration: The Traditional Funnel meets The Flipped Funnel (Photo credit: josephjaffe)

Dave McClure’s ‘Pirate” version of the customer life cycle: Acquisition, Activation, Retention, Referral, Revenue, is an excellent framework to use when calculating P&L contribution, payback period and ROI.  Mastering these metrics as part of the customer lifecycle enables marketers to create an optimized, easy to evolve strategy that evaluates ROIs across social media, search and direct response campaigns.

Let’s start with evaluating acquisition costs.

CPM

CPM stands for cost per 1000 impressions, which is the most common way to purchase display or banner ads.  For example, if you are purchasing ad space at a $10 CPM your ad will be shown 1000 times for $10.  To keep this simple, if your budget is $10,000 then mean your ad will be shown 1,000,000 times ($10,000 *(1000/$10)).

Total Impressions = (Total Cost or Budget) * (1000/CPM)

If you are trying to find out how much you will pay for a given number of impressions then you can use the following formula:

Total Cost = (Total Impressions * CPM)/1000)

You’re probably wondering how to translate impressions into people or how to estimate the number of clicks.  This is the right question!  However, it’s impossible to calculate this since CPM advertising is solely based on impressions.  Setting a frequency cap helps avoid the worst-case scenario of serving all the impression to one person only.

CPC

CPC stands for Cost Per Click.  In this type of advertising, you only pay for the number of clicks on your ads regardless of the number of impressions.  Google Adwords made this model popular and generally speaking, search and text advertising is sold by CPC model.

For example, if the CPC is $1.00 and your ad is shown 12,000 times but gets no clicks then you pay nothing. If you get 10 clicks on your ad then you pay $1.00X10 = $10.00.

CPC = Total Cost/Total Clicks

Total Cost = CPC * Total Clicks

Comparing CPM to CPC and vice versa

Choosing one model versus the other is really dependent on where you are in the customer life cycle.  If you are focused on driving brand awareness as a new brand or company, it makes sense to generate as many impressions as possible.  Facebook Ads is great for this: highly targeted and segmented customer base with A/B testing capabilities built in.

If you have great brand awareness already or are farther along in your customer lifecycle, CPC may make more sense.  The best approach is to compare two models to figure out where and how to spend your money effectively.  To do this, you need to convert CPM to CPC or CPC to CPM pricing.

CPM to CPC conversion

Here is a formula for doing this: CPC = ((Total Impression *CPM)/(1000 *Clicks).  Let’s take an example of a campaign that costs you $10 CPM and generates 50 clicks in 50,000 impressions.

    Formula
CPM $10 Known variable
Impressions 50,000 Known variable
Click 100 Expected or Known
Total Cost $500 Impressions * (CPM/1000)
Cost Per Click $5 Total Cost/Clicks

The above $10 CPM campaign is equivalent to a $5 CPC campaign.   The difference is that the CPC approach brings the customer to your website versus just letting them know you have one.  This means that the customer has 1) seen an ad meaning you’ve already earned revenue or 2) is one step closer to purchasing a digital subscription.  The challenge is that (click through rates) CTRs are steadily declining.

CPC to CPM conversion

Here is a formula that you can use to calculate a CPM equivalent of a CPC model:

CPM = (CPC*clicks*1000)/Total Impressions

Let’s take an example of a campaign that costs $4 per click and generates 100 clicks, resulting in a total spend of $400. Let’s say it took 50,000 impressions to generate those 100 clicks.

    Formula
CPC $4 Known variable
Clicks 100 Known variable
Total Cost $400 CPC*Clicks
Impressions 50,000 Impressions * CPM/1000
Cost per 1000 Impressions 8 Total Cost/(Total Impressions/1000)
CPM $8 Cost per 1000 Impressions

eCPM

The CPM value you get when you convert CPC into CPM is also known as eCPM (effective CPM). eCPM is also shown in Adsense reports, in that case. Total Adsense Revenue /(Impressions/1000)

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