Proper understanding of these terms will help in finding CAC and LTV.

Most of the entrepreneurs when pitch their idea in startup competitions mention that they will earn through advertisements and fail to answer the counters put forward by the jury which uses the jargon like CTR, CPC, CPM etc.

Today, we will talk about three (03) basic terms which you must be aware of, if you business model is based on earning through ads placed on your website.

CTR – The Effectiveness Indicator

CTR or Click Through Rate is a percentage that tells you the frequency of how often your advertisement is being clicked on, on the internet. It is a ratio between the numbers of times people click on your link to the number of times your advertisement appears on the screens. CTR will help you judge how strong your keywords are and how well your ads are achieving. It will be give you a success rate of your advertisements.

For example you created an ad of shoes. If your shoes ad is appearing 10 times on the screen and only two people are clicking on the link which will take them to another webpage, then the CTR is, 2 (clicks on the link) divided by 10 (number of times the ad appeared). Your CTR value will be 0.2. the higher the CTR, the more successful is your ad.

The impression in the following picture means advertisements:

CPC – The Cost/Earning Indicator

CPC is Cost Per Click which is amount that an advertisers pays to the publishers depending on the number of clicks. A fixed amount is attributed to a single click. The number of times the link is clicked on, the amount will multiply accordingly.

For example, lets say you are an advertiser. You have made a deal with a website owner who will run your ad on his/her website and the website owner says that CPC is Rs. 10/- 

Now, every time when someone will click on your ad which was displayed on that website, you will have to pay Rs. 10/- to the website owner. This is the cost incurred to you.

However, look at it the other way round with you, being the website owner. In that case you will be earning Rs. 10/- per each click instead of paying. So, if you have a high traffic and people are clicking on your ads that means you are earning!

CPM – The Traffic Indicator

CPM or Cost Per Mile. Mile is a Latin word which stands for ‘thousands’, therefore CPM also means Cost Per Thousands. It is price that the advertiser pays to publicize a thousand ads on a website. This kind of advertisement payment is the most common method as it is preferred by the website owners. Unlike CPC, where the advertiser only pays when his ad is clicked on. In CPM, the advertiser has to pay regardless of anyone opening the link.

Keeping the above example in mind, if you are an advertiser, you would pay the website owner once; say an amount Rs. 500/- to publish your thousand ads. If you are a website owner, then you would be earning that Rs. 500/- instead of paying it.

Takeaways

1. CTR – Click Through Rate helps you identify the effectiveness of your ad.
2. CPC – Cost Per Click is where you are charged or you earn on per click basis depending on whether you are advertising or are an advertiser.
3. CPM – Cost Per Mile is where you buy or sell 1000 impressions (traffic) for a fixed price.

Graphical Illustration

Here is an infographic published by Digital In Asia which explains how to calculate these terms.