Understanding The Basics Of Advertising Math

Key rules and points to follow here advertising online. A really quick and basic overview for marketers getting started online. First off:

CTR = Clicks/Impressions x 100

CTR stands for “click thru rate” and it’s the total number of clicks divided by the total number of impressions. You multiply 100 to get a percentage. EG – your banner ad gets 10,000 impressions and while it was running 100 people clicked on the banner you would calculate your CTR by:

CTR = Clicks/Impressions x 100
CTR = 100/10,000 x 100
CTR = .01 x 100
CTR = 1%

Your cost per click (CPC) is the costs of your traffic divided by the number of clicks. EG – spending $50 on traffic and getting 100 clicks you get $0.50 per click.

Now to calculate CPC using your CPM and CTR we will do a short exercise. CPM is what you pay per 1,000 impressions and for this case it’s going to be $5. $5 is what your traffic just cost you. Now you need to figure out your amount of clicks and to do that you would use your CTR. So if your CTR in this case is 1% this means 1% of your impressions were clicked on. Now remember you bought 1,000 impressions so that’s why you have 1,000 X CTR here. When you multiply your 1,000 impressions by your 1% CTR you get 10 clicks and end up with a cost per click CPC of $0.50 a click.

CPC = CPM / 1,000 x CTR
CPC = $5 / 1,000 x 1%
CPC = $5 / 10
CPC = $0.50

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CR = Actions/Clicks x 100
CR or Conversion Rate is the number of actions divided by the number of clicks. Whether it’s a lead or a sale, your conversion rate will vary on what you want it to be. Whenever a user completes a transaction for you, this is your conversion. Previously we said that we had an example of paying $0.50 a click. Now let’s say you receive 100 clicks and out of those 100 clicks 2 of them resulted in sales for you. We now divide the number of actions/conversions which is 2, by the number of clicks which is 100. The result is 0.02 multiplied by 100 which gives us a CR of 2%

CR = Actions/Clicks x 100
CR = 2 / 100 x 100
CR = .02 x 100
CR = 2%

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CPA = CPC/CR

Your cost per acquisition CPA is your cost per click divided by your conversion rate. Use the same examples above and say you paid for 10,000 impressions on a traffic source at a CPM of $5. Since it’s $5 per 1000 impressions, you will pay $50 for 10,000 impressions. Out of these impressions, you got 100 clicks from which you made 2 sales. Now you have everything to calculate your CPA. $50 paid and 100 clicks received means your cost per click CPC is $0.50 a click. You also now that out of those 100 clicks you made 2 sales, making your CR 2%. Now using your formula and divide the CPC of $0.50 by your CR of 2% and find your CPA to be $25.00. Makes sense right? You spent $50 and made two sales making your CPA $25 thus break even.

CPC = Cost / Clicks = $50 / 100 = $0.50
CR = Actions / Clicks x 100 = 2 / 100 x 100 = 2%
CPA = CPC / CR
CPA = $0.50 / 2%
CPA = $25

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