Opportunities to buy digital advertising are endless. There’s an army of ad salespeople pushing various options, talking about how “limited” or “exclusive” their opportunity is, how lucky you are that they have a slot open, etc. These salespeople will push banners in online magazines, forum sponsorships, upgrades for premium listings, packages that combine online and print ads, etc.
Yet aside from creative concerns (How can we make ads that work? What size and format can we use? etc.), buying online advertising is a purely mathematical decision. The math is brutally simple and once you know it, you’ll be able to quickly and decisively evaluate advertising opportunities. Here’s how you make the decision to buy – or not buy – digital advertising, so as not to lose your shorts.
Step 1 – Get the Parameters
You should only buy digital advertising when the publisher can tell you:
- How much it costs to buy a digital placement. If you’re buying a banner ad or a sponsorship, it’s usually a flat fee. NOTE: If you’re buying advertising on a cost per click basis, skip to step 3.
- How many impressions your ads will receive during the ad buy period. An “impression” is a chance for someone to see your ad. If someone views a page, and your ad is on that page, that counts as an “impression.”
- What the typical click-thru-rate (CTR) of the ad placement has been. A click-thru-rate is a percentage – 1% CTR means that 1 out of every 100 people will click on the ad. 0.1% CTR means that 1 out of every 1,000 people will click on your ad.
NOTE: If the salesperson can’t provide you with an estimate of CTR, not to worry. You can just use an industry average CTR of 0.2%.
Step 2 – Grab The Calculator
Once you know the cost of the ads, number of impressions your ads are likely to get for that cost, and you have a CTR rate, you can calculate a cost per click. Here’s how you do it:
- Take the total number of impressions, and divide by 1,000. This will give you a number that’s easier to work with…instead of talking about 200,000 impressions, you can talk about 200.
- Take the total cost of the ads and divide by the number above. If the total cost is $1,000, and the impression count is 200k, than you divide $1,000 by 200. This gives you a “cost per thousand” rate on your advertising, which us advertising people refer to as “CPM” (cost per mil). In our example, the CPM is $5.
- Take the CPM and divide it by 2. This will give you a cost per click estimate using an industry average CTR (which is 0.2%). Using $5 as our CPM and 0.2% as our CTR, we come up with a cost per click (CPC) of $2.50.
- If the ad seller says the CTR is higher than 0.2%, multiply whatever percentage they give you by 1,000. This is the number of clicks they say you’ll get per 1,000 impressions. Divide the CPM by this number to get a cost per click.
Here’s another example:
Ad Cost: $4,950
Est. Impressions: 345,000
The CPM is $14.30 – ($4,950 / 345).
Using an industry average CTR, the CPC is $7.15 – ($14.30 / 2).
Using the CTR of 0.5%, 1,000 impressions could result in 5 clicks (0.5% * 1,000). The CPC would fall to $2.86 – (14.30 / 5).
Be sure to do this math yourself so you understand.
Pro Tip: To save time, don’t worry about calculating CTRs. Just assume you’re only going to get 1-3 clicks per 1,000 impressions, as that’s the general range of click thru rates industry-wide. That makes the math even easier.
Step 3 – How Does The Cost per Click Compare?
Once you have your cost per click estimate, you can start to compare that cost to other advertising opportunities. Take a look at how much you’re paying per clicks on AdWords, Facebook, and other digital ads you’re running. How does the cost of this opportunity compare?
Additionally, how do you think your clicks will perform? Let’s say that 2% of your AdWords clicks turn into paying customers – is there any reason to expect people clicking on this banner ad to be more likely to buy? Any reason to think they’ll be less likely to buy?
Step 4 – Ask For Documentation
Assuming that you can live with the cost per click you’ve estimated, and assuming that you believe the clicks from your ads will perform well enough to justify their cost, ask the ad salesperson for proof of their impression estimates, CTR, and any other stats/facts they given you. Most salespeople should be able to provide you with a screenshot of Google Analytics data (or similar), some sort of stat software output, etc.
If documentation isn’t available, be very careful…it’s not at all unheard of for ad salespeople to fudge their numbers.
Step 5 – Negotiate
Now that you have documentation to go with your CPC estimate, it’s time to ask for a discount. One of the best ways to ask for a reduced rate is to tell the ad salesperson what you’re paying per click on other websites, and ask them to reduce the CPM to match that price.
For example: You’re advertising on “Forum X,” and the average cost per click is about $2. You’ve estimated the cost per click for “Forum Y” at $4. You explain to the ad salesperson that their advertising seems to be twice as expensive as a competitor, and then ask them if they can reduce the rate to match.
You can also try asking the salesperson to sell you their advertising on a cost per click basis. Explain that you’re happy to pay $2 per click, for example, and that you’ll work with them on the banner you use, the placement location, etc. to get to a “win-win” situation. Most publishers would prefer to sell you advertising on an impression basis (it’s easier), but some will work with you on a cost per click basis if you ask.
Step 6 – Test and Track
Assuming that you can come together on a price, test the ad buy for 30 days. Most publishers should let you try an advertisement for 30 days, only some may want you to go 60 or 90. During your test you should be able to track the number of clicks your ads are getting AND how those clicks perform on your site.
If your click volume meets or exceeds your estimates – and the clicks are performing – congratulations. You’ve found a good advertising option.
Last But Not Least
Some general rules of thumb:
- Beware of publishers that can’t give you impression estimates
- Beware of publishers that can’t give you documentation
- Beware of publishers that won’t let you try advertising for a short period of time (90 days or less)
Publishers who can’t or won’t do these things aren’t necessarily trying to steal from you, but generally speaking they are trying to obscure the fact that advertising with them isn’t a good value. Consider yourself warned.