Cost per thousand versus other ad pricing methods
As mentioned, cost per thousand isn’t the only way to price digital advertising.
When an advertiser uses cost-per-click pricing, they’ll only pay the advertising company when someone actually clicks through on the advertisements. This is most useful for advertisers that are trying to get people to visit their website or product page.
An advertiser using cost-per-action pricing only pays an advertiser when an ad converts into a product sale, email signup, app installation, or a number of other desirable actions. Measuring these conversions has become increasingly difficult amid crackdowns on tracking user activity across apps, but it remains viable for some ad tech companies on some platforms while others use sophisticated models to estimate conversions where they’re not explicitly measurable. Cost-per-action pricing is best used when an advertiser gets a lot of value from a conversion, but not much value if an ad impression doesn’t convert.
Cost per thousand is best used for branding campaigns. A company that merely wants to get in front of customers, like Coca Cola (KO -0.30%), may run a campaign and pay per thousand impressions. The company is not expecting customers to click on the ads and learn more and buy its product online (but it wouldn’t complain if they did). It wants to remind consumers of the products it sells, so next time they’re in the grocery store, they pick up a case of Coke.
What investors need to know about CPM
If you invest in tech companies that derive most of their revenue from advertising, CPMs will play an important role in ad revenue.
A company that can produce high CPMs relative to its peers exhibits pricing power, indicating a competitive advantage. That competitive advantage may be that it has better data, allowing it to target its advertisements better and making each impression more valuable. It may also be that it has a broader audience, which attracts the biggest advertisers looking to reach the most people, where they may not bother advertising on smaller platforms. Two companies with both of those advantages are Meta Platforms and Alphabet’s Google.
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