Return on Ad Spend: CPA vs CPM vs CPI – What’s the Best Model?
Why Return On Ad Spend Is Important? Most businesses today recognize the value of digital marketing. In just a few short years, digital marketing has gone from an interesting idea, to a cool option, to a necessary add-on, to an absolute necessity. In fact, digital marketing makes up the majority of most businesses’ ad spend dollars, or at the very least, it’s the focal point of their overall plan.
When digital advertising first began, there were only a few models – either CPM (Cost-per-Mille) or CPC (Cost-per-Click) that charged an advertiser based on the number of instances the ad was served or by the number of times a user clicked on the ad. That was then, though, when about the only digital marketing offered was banner display ads.
Since then, the digital landscape has changed quite dramatically, and pricing models of digital advertising have changed as a result, as offerings have expanded to drive different sorts of engagements. Today, in addition to CPM, other digital advertising pricing models include CPA (Cost-per-Action) and CPI (Cost-per-Install).
But what is the best digital advertising model that drives the highest return on ad spend? The answer, of course, is it depends on what action and engagement you are trying to encourage through your digital ad campaign.
What is Return on Ad Spend?
Before we can dive into the three types of pricing models, it’s important to first understand exactly what Return on ad spend (or ROAS) is. It’s a very simple metric, actually, that advertisers can use to determine the value they’re getting out of their digital marketing campaigns.
The beauty of digital marketing is everything can be tracked, and as such, it’s very simple to perform a calculation that spits out a solid measurement to assess the campaign’s performance.
To calculate your ROAS, all you need to do is take the revenue you received from the ad and then divide that by the cost of your ad. For example, if you spent $1,000 on advertising, and your campaign netted $2,000 in revenue from it, your ROAS would be 2:1 or 200 percent. In other words, for every $1 you spent in advertising, you earned back $2 in revenue. That would be a pretty solid return.
Now that we know what ROAS is, let’s take a look at the different digital pricing models to see if one stands out among the others in terms of driving a higher ROAS.
The CPM model is the original model for digital advertising. It was designed for banner advertising, and because of that, it’s a way businesses traditionally look to increase brand awareness. It’s very similar, in fact, to the model of a physical billboard.
Under the CPM model, the advertiser is charged for every 1,000 times the ad is served to visitors of a site. In this model, it doesn’t matter how many (or how few times) a person actually interacts with the ad. The pricing is only based on how many times the ad is served.
The CPM model is great because it allows for scalability on a very large scale. It’s easy to just buy more impressions and pay for those impressions at the same CPM rate. Advertisers that create a very engaging creative for that ad can get an excellent ROAS on the CPM model, because the cost of the ad does not increase as more people interact with it. On the flip side, though, CPM doesn’t guarantee any results at all, since it’s based just on how many times the ad is served.
CPM is great for mobile advertising, because mobile’s ability to offer rich media capabilities can drive engagement and, therefore, drive the cost-per-engagement much lower than other models. If you are after impressions and branding your company to a wide audience, then the CPM model is a great way to boost your ROAS.
The CPI pricing model is a newer digital advertising model, since it is only possible because of the advent of easy accessibility to apps and other digital downloads. Under this model, a business is charged every time a particular application is installed by a visitor who clicks on the ad.
Under this scenario, the digital advertisement would look to influence visitors to download a mobile application, and when they click on the advertisement, it would redirect their device to automatically download the app.
CPI, then, is very simply calculated by diving the cost by the number of installations. Because this is such a highly-specific engagement that businesses are driving through this advertising, the cost per install can be quite high.
On one hand, that cost may be off-set by the fact that the business knows that just about everyone who clicks on the ad will actually be downloading and using the app. On the flip side, the CPI model only emphasizes the number of app installs and nothing else. The business, in this model, doesn’t have control over any other actionable steps the visitor takes.
The third model charges an advertiser for a specified action the visitor takes. This action takes place after the ad is served, and after the visitor clicks on the ad. These actions could be an install of an app, an in-app sale, the submission of a form and other actions. A lot of businesses prefer the CPA model because it allows them to have the assurance that what they are paying for results in an engagement they can measure.
On the one hand, the Cost per action model is great for the advertiser because it allows them to know exactly how much they are going to pay for each action before the action even happens. At the same time, the advertiser isn’t able to track what their consumers do beyond that action, and they may not be able to reach a large number of potential customers like a CPM model would. In essence, a CPA model emphasizes that final step of the visitor’s journey and nothing before and/or after it.
What drives Return on Ad Spend (ROAS)?
Ultimately, what drives the best return on ad spend depends largely on the action or actions you are trying to encourage with your digital advertising. It is extremely important to fully grasp what it is you’re trying to accomplish before choosing a pricing model. By doing so, you’ll be ensuring yourself a much higher ROAS.
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