Question

Each advertiser is bidding $3 CPM. Is this a good idea? For which advertiser it makes sense and for which it doesn’t? Fill out the blank parts of the chart and provide reasoning.

	Advertiser 1	Advertiser 2	Advertiser 3
CTR	0.8%	0.7%	0.6%
Conversion Rate	2.3%	3.1%	1.9%
Profit per conversion	$15	$20	$30
CPM	$3	$3	$3
CPC
CPA

Answer 1

Blank parts are solved individually:

	Advertiser 1	Advertiser 2	Advertiser 3
CTR	0.8%	0.7%	0.6%
Conversion Rate	2.3%	3.1%	1.9%
Profit Per Conversion	$15	$20	$30
CPM	$3	$3	$3
CPC	(a)	(c)	(e)
CPA	(b)	(d)	(f)

(a) CTR is the percentage of ads clicked per number of impressions.

Hence out of every 1000 impressions (which will cost $3), 8 of them will be clicked.

So, Cost per click (CPC) = Total cost of clicks / Total number of clicks

= $3 / 8

   = $0.375 per click

(b) Cost per Action (CPA) is the cost incurred by an advertiser in converting a customer (making a sale).

From (a), 8 advertisements will be clicked, out of which conversion will be of 0.184 customer(s) (2.3%)

CPA = Total cost incurred in performing the action / Total number of actions performed

= $3 / 0.184

= $16.304 (approx.) per action (sale)

(c) CTR is the percentage of ads clicked per number of impressions.

Hence out of every 1000 impressions (which will cost $3), 7 of them will be clicked.

So, Cost per click (CPC) = Total cost of clicks / Total number of clicks

= $3 / 7

= $0.4285 (approx.) per click

(d) Cost per Action (CPA) is the cost incurred by an advertiser in converting a customer (making a sale).

From (c), 7 advertisements will be clicked, out of which conversion will be of 0.217 customer(s) (3.1%)

CPA = Total cost incurred in performing the action / Total number of actions performed

= $3 / 0.217

= $13.825 (approx.) per action (sale)

(e) CTR is the percentage of ads clicked per number of impressions.

Hence out of every 1000 impressions (which will cost $3), 6 of them will be clicked.

So, Cost per click (CPC) = Total cost of clicks / Total number of clicks

    = $3 / 6

   = $0.5 per click

(f) Cost per Action (CPA) is the cost incurred by an advertiser in converting a customer (making a sale).

From (e), 6 advertisements will be clicked, out of which conversion will be of 0.114 customer(s) (1.9%)

CPA = Total cost incurred in performing the action / Total number of actions performed

= $3 / 0.114

= $26.316 (approx.) per action (sale)

Answer:

	Advertiser 1	Advertiser 2	Advertiser 3
CTR	0.8%	0.7%	0.6%
Conversion Rate	2.3%	3.1%	1.9%
Profit Per Conversion	$15	$20	$30
CPM	$3	$3	$3
CPC	$0.375	$0.4285	$0.5
CPA	$16.304	$13.825	$26.316

This is NOT a good idea for Advertiser 1 since his cost of acquisition (CPA) exceeds his profit per conversion. He/She will be incurring a net loss of $1.304 per conversion.

This is DEFINITELY a good idea for Advertiser 2 since his profit per conversion exceeds his cost of acquisition (CPA). He/She will be incurring a net profit of $6.175 per conversion.

This is DEFINITELY a good idea for Advertiser 3 since his profit per conversion exceeds his cost of acquisition (CPA). He/She will be incurring a net profit of $3.684 per conversion.