CPM vs CPC IconWhen getting started with online advertising, one of the first questions people will ask is, “Should I bid on a CPM or CPC basis?” Ultimately it’s a personal preference for most advertisers, however this guide should help answer your questions and determine which you should use. By default, most people go the CPC route, however there are legitimate reasons to occasionally bid on a CPM basis. Read on to figure out which you should use.

How Facebook Ads Work

Before jumping in to the difference between cost per click (CPC) ads and cost per thousand impressions (CPM) ads, we thought we’d provide a basic over view of how Facebook’s ad system works. Ultimately, Facebook’s ad network operates as a blind auction. Advertisers bid to have their ads displayed to various demographics. Facebook then displays those ads which perform the best (or generate the highest CPM for Facebook).

The Initial Test
While Facebook already knows how ads that have been running beyond the first few thousand impressions will perform, Facebook must test all new advertisements to determine their effectiveness. It’s during this period that the future of your ad will be determined. The goal for Facebook is to run those ads which will generate them the most revenue by run ads that maximize their CPM. Whether or not you bid on a CPC or CPM basis, Facebook must run your ads to determine their performance.

If your ad gets 10,000 impressions and no clicks, but you bid on a CPC basis, Facebook will eventually push your ad out of the rotation. This is because you aren’t generating any revenue for them. If however, you bid on a CPM basis, Facebook will be guaranteed that your impressions will at least generate some level of revenue.

Getting Flagged
If for some reason your advertisements start performing insanely well (for example, you are able to get your CPC down to $0.01), Facebook will eventually take note and check whether or not your ads violate any terms. If they don’t, they will be allowed to continue to run, but they won’t be optimized for as many impressions since they don’t maximize revenue for Facebook. It’s extremely rare that ads will attract exceptionally low CPCs, which is why Facebook will tend to investigate ads, or campaigns, that perform at this level.

There’s A Balance
The reality is that there’s a balance for all advertisements run on Facebook. While the company will run your ads, even if they are performing insanely well, they must come close to matching the “house CPM”. The best way to look at the “house CPM” is this: it’s the amount Facebook would have generated if they didn’t run your ad. As you begin running numerous ad campaigns, you can figure out what Facebook’s current house CPM is based on how your ad performs. This is for people who are running numerous campaigns however.

Ad Variations & Market Variations

The single largest determinants of the cost of your Facebook advertising campaigns are your ads and the target demographics you are going after. Some demographic groups have been targeted heavily and as such, have a much higher “house CPM”. As you adjust your ad title, body copy, and image, you will sometimes see dramatic variations in performance. This variation between ads and market prices (testing various demographic groups) is exactly what professional advertisers spend their time testing. Another word for these individuals is “optimizers”.

As defined in our Facebook marketing dictionary, optimization is the process through which an advertiser minimizes the cost of advertising while simultaneously maximizing performance to reach the ad campaign objectives. Optimization is a luxury for those that have money to test ads. If you don’t have the time to invest in optimization, you are going to end up spending more for your individual ads.

For some people this is fine as long as they know that they are getting some level of performance. However, for advertisers who are investing in the long-term performance of their campaigns, optimization is a process which is not only smart, it should be a requirement as it will maximize your performance and cut down your cost. Enough of this long winded response though, let’s get to the part you came here for: CPC vs CPM!

Why You Would Select CPC?

The most obvious reason for selecting a CPC bid is that you are only charged when people click on your ads. This means that in theory, you could get thousands of “free impressions”. The reality is that these “free impressions” aren’t really worth that much to you (yes, this is debatable). For advertisers, you want to pay for ads that generate results. However if you have a low budget ($5 a day or even $20) and you don’t have time for optimization, your best bet is to just go with CPC.

While an ad optimizer could also use CPC to test their campaigns, an expert optimizer will at some point use CPM for extremely high performance ads. The reason is that when bidding on a CPC basis, you will never pay less than your bid rate.

Why You Would Select CPM?

CPM, or cost per thousand impressions (aka. cost per thousand pageviews), is an advertising model that people running tens, hundreds, or even thousands of ad combinations will often use. The reason is that ads can perform better than Facebook’s recommended CPM and CPC bid rates. The only way to maximize your performance beyond a stated bid rate and figure out the lowest possible bid is to run on a CPM basis.

The reason is that your CPM bid has nothing to do with how well it will actually perform. In other words, I could bid $1.00 for 1,000 impressions, but if my click through rate is exceptionally high, my ads could end up obtaining a CPM of $0.10 despite the fact that I bid $1.00. In turn, my ads will outperform Facebook’s estimated bid rates. Keep in mind, if you are running CPM campaigns, you must monitor your ads closely for two reasons:

  1. You could burn through your budget on low performing ads
  2. Your ad performance will decrease over time, in turn pushing your effective campaign CPM up over time

Ultimately It Comes Down To CPA

While you can’t currently bid through Facebook on a cost per action (CPA) basis, advertisers need to measure how their ads perform on a conversion basis. Whether you want a user to become a fan of your page, download an ebook, install an application, pay for some digital good, or something else, the ultimate cost is how much you are paying for a user to perform an action. If for some reason you are just looking to drive traffic to your site, and you don’t care about performance (which makes little sense), you could try to minimize your CPC. However if you were just looking to buy traffic you could easily go to StumbleUpon and buy traffic at $0.05 per visitor.

Your Best Bet

Confused? Don’t worry! If you aren’t spending a lot of money on ads, and you are new to Facebook ads, your best bet is to bid on a CPC basis. This way, you are hedging against your exposure to low performing advertisements. Additionally, the real test that you want to figure out is how to maximize your click through rate (CTR) within your ads. Whichever have the highest click through rate will tend to be the best performing over time.

Over the coming weeks we will go into more details about how to measure the performance of your campaigns and go into more detail about the ads and the various terms. If you want to stay up to date on the latest Facebook marketing news and tips, click here to subscribe to our Facebook marketing weekly newsletter.