CPM stands for Cost-Per-Thousand. The M stands for 1,000 in Roman numeral. It refers to the cost of every thousand impressions or times your ad appears.
CPM pricing strategy is commonly used for display and Facebook advertising. However, practically all advertising channels use CPM, even if you are running a CPC campaign. What happens is that the advertising network will internally calculate a CPM that advertisers are not aware of. This is why if you have a high click-through-rate on your ad, the cheaper your CPC will be as everything is based on CPM or impressions. Now, the question is which bidding strategy should you use, CPC or CPM?
To give you a better idea, I will use an example..
Peter and Bob are competing for 1,000 ad impressions on Facebook. Since all ad networks sell their ad inventory in a bidding auction, it is fair to believe that whoever pays the most will win. Unfortunately, this is not entirely true because ad networks consider other factors as well such as your ad’s CTR, regardless of the bidding strategy the advertisers are using.
Let’ say Peter is bidding on $3.00 CPM for 1,000 ad impressions on Facebook. Peter’s ad CTR is around 0.75%. Bob is bidding on $0.50 CPC and his ad CTR is also around 0.75%.
Now who do you think will win the ad auction? Let’s look at it from Facebook’s perspective.
Facebook will make $3.00 from Peter for 1,000 ad impressions, regardless of the ad’s CTR.
For Peter, here’s how the calculation looks like:
CPM x 1,000 Impressions = Cost to Advertiser
$3.00CPM x 1 Impressions = $3.00
On the other hand, Facebook has to look at Bob’s CTR because for every 1,000 impressions that Facebook gives to Bob, they don’t know how much they will make from him.
For Bob, we need to work our way back to calculate a CPM or effective CPM (eCPM) to compare:
CPC x CTR x 1,000 Impressions = eCPM (Cost to Advertiser)
$0.50 x 0.75% x 1,000 Impressions = $3.75
As you can see, Bob will win the ad auction because Facebook will make $0.75 more with Bob than Peter. In order for Bob to keep winning the ad inventory, he has to maintain his CTR. If Bob’s CTR drops, Facebook will grant Peter the ad inventory.
An example of this is if Bob’s ad CTR drops down to 0.55% at $0.50 CPC:
$0.50 x 0.55% x 1,000 Impressions = $2.75
Now, Facebook will earn $0.25 more with Peter than with Bob. Thus, Peter will receive the 1,000 ad impressions instead.