To Make Display Ad Campaigns Work Their Best, Know Your Economic Model

Posted on March 17th, 2010

There are so many things that make online display advertising great, but sometimes it can be tough to make effective display advertising.  There are process and creative factors to get right – but those discussions aside, at the end of the day, the decision to make display advertising a part of your marketing mix is a question of economics.

One of the most common discussions we have with our clients is talking about media plans:  the (sometimes not so artful) art of deciding where to run your ads and how much to pay.  It’s the economic driver underneath the creative and communications of display advertising.  The major variable that affects ad placement decisions is your budget. Not only your total budget for advertising, but knowing what value you need to get out of each impression and click. This will go a long way to focusing your plan.

5 Variables of Your Display Advertising Economic Model

Here are 5 variables you need to know to about display advertising online:

CPM:  This is your cost per thousand impressions (“mille” is Latin for thousand).  Every time your display ad shows up 1,000 times on a site or upon an ad network, you pay the site publisher or network this fee. Broadly speaking, CPM ranges can be from $1 to $6 in many cases. For premium sites CPM can be $30 – $50.  CPM is the baseline price measurement in banner ad economics.

CPC: Cost per click.   CPC is the baseline price measurement in search ad economics, but is also now widely used in calculations concerning display.  CPC is how much you have paid when a user has clicked on an ad. Because of the popularity of paid search, a lot of networks and publishers will offer a pay per click (PPC) option to their advertisers. But even if you are paying by CPM, it is good to know your CPC.  The simple formula for CPC is your total spend divided by resulting clicks.  If you spent $500 to get 350 clicks, your CPC is $1.42.

CTR: Click through rate.  This is expressed in a percentage that tells you how often someone who sees your ad clicks on it. A percentage means “out of a hundred times”.  CTRs are generally low: fractions of a single percent.  The formula is CTR = (clicks / impressions) * 100% . A CTR of 0.2% means that it takes 5oo impressions to produce a single click: (1 click / 500 impressions) = 0.002. Then, 0.002 *100% = 0.2%.

LPCVN:  Landing page conversion rate. A landing page is where a banner ad or link takes a consumer when they click on your ad. Your campaign is to convert clickers into doers. This can be your home page or specially designed page that matches the theme and message of your ad. The landing page conversion rate is the percentage of time that someone who has clicked on your ad completes the desired transaction, e.g. was converted. This could be to complete a form, buy a product, sign up for an account, whatever that goal is for your campaign.

CPL: Cost per lead.  This could also be known as CPA  or cost per action.  CPL is your total media spend for the campaign divided by the number of people that completed the action.

A Sample Model: The Financial Planner’s Campaign

Let’s put this model into a sample case study. Let’s say you are a financial planner and you want to run a banner ad campaign that advertises a “Free Market Analysis and Portfolio Evaluation”. You need people to see your ad, click on it, and complete a contact form.
In online advertising terms, that means you need to buy impressions (people seeing your ad), you need people to click on your ad (clicks) and you need to convert clickers into sales leads (conversions).

So what should we pay for impressions? Let’s begin with the numbers that we know and use them to figure out the number we don’t know.

You should start by knowing the value of a lead.. Based on your business history, you believe that getting a single lead is worth $50 to you.  So your CPL = $50.

You decide to try a test campaign and buy 5,000,000 impressions with an ad network – a grouping of websites that display ads.  In other words, you are buying five million appearances of your ad.  You have picked an ad network with a financial focus – that is, a network made up of sites that publish financial content relevant to your campaign and target audience.

In this sample case, how much should you pay the ad network? In other words, how much should you pay per 1,000 impressions of your ad? Yet another way to ask this question is: what is the maximum CPM?

We don’t have to guess.

We start with the number we know: one lead is worth fifty bucks to you.  To put it in online advertising terms, your cost per lead (CPL) is $50, or,

CPL = $50.

Next, look at landing page conversion rate or LPCVN.  This is how many viewers out of a hundred that on average fill out your form.  Conversion rates vary widely and are driven strongly by how well you have designed your landing page and your offer. For our exercise, let’s assume your design and creative is strong enough to get you a conversion rate of 3%.  (Obviously, your own campaign’s history will show you the best number to use, but you can model using different rates as well).

LPCVN = 3%

So we know what a lead is worth, and we have guesstimated how effective our landing page is in generating leads.  But we also need clicks to bring people to the landing page.  This is where we reach for the click through rate or CTR.

These days, click through rates for display advertising commonly ranges  from .1% to .3%.  (There are exceptions – some ads, ad networks, niches, etc. perform higher and some perform lower.)   Let’s pick 0.25% as our CTR for our model.

CTR = 0.25%

We now know enough to figure out what your maximum CPM is.  So let’s relive 8th grade algebra with the following equation:

CPL= ((Impressions / 1000) * CPM) / ((Impressions *CTR) * LPCVN))

With our values, that becomes:

$50 = ((5,000,000 / 1000) * CPM) / ((5,000,000 *0.25%) * 3%))

or,

$50 = (5000 * CPM) / ((12,500) * 3%))

or,

$50 = (5000 * CPM) / (375)

To solve for CPM, multiply both sides by 375, then simplify

(50 * 375)= ((5000 * CPM) / 375) * 375

or

18,750 = (5000 * CPM)

then divide both sides by 5000 to isolate CPM

(18,750/5000) = (5000 * CPM) / 5000

or

$3.75 = CPM

The formula says your max CPM would be $3.75.  For each 1,000 impressions, you should pay no more than $3.75.

For kicks, let’s also figure out your CPC (cost per click)  – that’s spend divided by clicks:

CPC = $18,750 / 12,500

CPC = $1.50

Table 1. - CTR = .25% and LPCVN = 3%

As you can see by Table 1 above,  when CTR and LPCVN are held constant,  you can achieve your CPL goal of $50 if you buy media at $3.50 or less.

But what if your CTR falls to only .1%?   The effect is dramatic on your economic model:

Table 2: CTR falls to 0.10%

Instead of being able to spend up to $3.75 on your media – you can now only spend up to $1.50. While spending $1.50 vs $3.75 sounds better on the surface – what that does is limit the types of sites you can run on and what type of advance targeting you can do. Remember the goal: it’s not to get the cheapest media cost on a per unit basis – your goal is to get leads for $50 or less.

Let’s say you have adjusted your ad’s creative message many times and no matter what you try, you just cannot raise your CTR. So let’s instead focus on your landing page and see if we can improve that conversion by 2%.  That is the LPCVN variable, indicated on the table as “LP Conv”.

The effect is again dramatic:  leaving CTR the same at a low .1%,  by improving conversion rate to 5%, my media target goes up to $2.50. I can now also afford to pay more on a CPC basis as well:  $2.50 instead of $1.50.

Table 3 - LP Rises to 5%

The point of this exercise is to know where you need to start on the media cost side to have any hope of meeting your financial goals with your campaigns.  CTR and conversion rate play a huge role in what you can do with your media placement, which is exactly  why a good creative model is important to establish up front.

If you don’t know your CTR and conversion rate or how a much a lead is worth to you,  the only way to find out is to run some test campaigns and get the data. Our creative model approach is a good way to find out this information as efficiently as possible.

Once you know these variables, following this economic model will help make sure that you can scale your campaigns and not get turned upside down.  The point of advertising is positive ROI -  no matter how you decide to do it.

Filed under Digital Advertising, Display Advertising, Metrics, Online Advertising Marketplace |

2 Responses to “To Make Display Ad Campaigns Work Their Best, Know Your Economic Model”

1. NAI Study: Effective Display Advertising Is Targeted Display Advertising | AdBean Says:
   March 31st, 2010 at 5:48 am

   [...] a piece of content – whatever.  To see how conversion rates figure into  a media buy, check out my post on knowing your economic model and run some numbers! Criticism of behaviorally targeted ads by consumers, privacy advocates and the [...]

2. does false favourites work Says:
   April 8th, 2010 at 4:26 pm

   So happy to read such a interesting article that does not resort to base posturing to get the topic fulfilled. Thank you for an entertaining read.

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