Simple Formulas for Context Sensitive Advertising & PPC Advertising

By Angsuman Chakraborty, Gaea News Network
Friday, May 30, 2008

You have commonly heard terms like eCPM, CPM, CTR, Page Impressions, Page Views etc. What do they really mean. How are they related to each other? Let’s explore these terms and their relations.

Page Views / Page Impressions

= Number of pages in your site which were viewed by a human visitor. In Google AdSense or with any other programs it actually means the number of pages recognized by these programs as valid page impressions, which in most cases will be lower than than reported by log analyzer programs like awstats or webalizer. Page Views is concerned with human generated hits (people viewing pages on the website from browsers). Page Hits on the other hands includes all kind of page views, by humans as well as by bots, spiders etc. Page Hits will always be much larger than page views on an average site.

CTR = Click Through Ratio

In simple words it is the number of people who click on a advertisement link out of 100 pages which were visited by real people (page impressions). Higher CTR normally translates to higher revenue. So bad / blackhat SEO types often adopt unethical means to trick people into clicking on advertising links thereby increasing their revenue at the expense of advertisers. Advertisers don’t take it too kindly and this often leads in click fraud lawsuits that you read about in papers. CTR is a very interesting parameter.

CTR increases when:
1. Ads are more context sensitive
This is where Google score big over its competitors in most market segments. More context sensitive ads translate to more clicks and in turn more revenue (exception explained below).

2. Ads are placed closer to where viewers are likely to see them and pay attention to them.
Google Heatmaps provides good guidelines for ad placement for higher CTR. In general closer to content is good, away from content is bad except near navigation / scrollbar.

3. When the content isn’t interesting enough. Think about this for a minute. When the content isn’t interesting enough, viewers will see more interesting content via context sensitive advertisements to fulfill their needs. Unfortunately splogs (spam blogs) and auto generated content often falls in this segment and make a decent buck! This is a problem with the PPC (price-per-click_ advertising model in general and is well exploited by the unethical types. For long term success of PPC advertising model, ad mediators like Google and Yahoo must periodically ensure that the quality of content on publishers site conforms to a minimum acceptable level. This gives better value to advertisers and genuine publishers alike and will prosper the industry in the long run. Unfortunately publishers often complain that big players in this market often turn a blind eye towards such unethical publishers, thereby harming advertisers and genuine publishers and undermining the PPC advertisement market in the long run.

4. Viewers mistake content links for advertisements. This is the reason publishers try to embed ads in content. This is treading a fine line and so publishers like Google distinctly add a Ads by Google message below each ad block.

Average Payment per Click

Everyone talks about CTR and CPM. Almost nobody talks about average payment per click which to me is the single most important factor for web publishers. On average how much are you getting per click on your page? Ad mediators like Yahoo & Google take a cut of the actual payment made per click by advertisers. Average payment per click is a key factor for choosing an ad mediator like Google AdSense, YPN etc.
Note: Bigger publishers can often negotiate a better percentage of the revenue. The playing field isn’t even and not always fair.

CPM = cost per thousand impressions

eCPM is how much you (publisher) make per thousand impressions. If you negotiate directly with advertisers, you get CPM rates. When a third party negotiates it for you, you are left with eCPM.

eCPM = CPM - % Ad mediators cut

If for example Google takes 30% (just a wild guess) from your earnings then eCPM will be 0.7 X CPM.

eCPM = CTR (in percent) X Average Payment per Click X 10

eCPM is directly dependent upon average payment per click and CTR. So even with constant or increasing CTR, your payment may go down if you are paid lower per click.

For example if you have 3% CTR and you get paid 20 cents ( = 0.2$ ) per click then your eCPM = 3 X .2 X 10 = 6

Total Click = CTR X Page Impressions / 100

This one should be fairly obvious. The result is divided by 100 because CTR is expressed normally in percentage.

Earnings = eCPM X Page Impressions / 1000

Again this should be fairly evident to you at this point.
Note: The result is divided by 1000 because eCPM is per thousand impressions.

Higher eCPM converts to higher earnings and so does higher page impressions. So finally we get:

Earnings = CTR X Average Payment per Click X Page Impressions / 100

Your earnings directly depend on your CTR (how much your viewers are clicking on your ads), how much your ad provider / mediator is giving you on average per click and finally on your page impressions that you are giving this advertiser. Initially I strongly recommend any publisher to target higher page impressions. The rest of them are easy when you have good number of page impressions to show.

Are you with me so far? Good, now you have a basic understanding of concepts behind context sensitive PPC ads. Feel free to ask any questions below or discuss it in our forums.

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