The purpose of this post is to clarify the terms CPM and CPC and also show how to convert from one model to the other.
CPM stands for Cost per 1000 Impressions (number of times the ad is shown) (M is Roman numeral for 1000). Generally display advertising (e.g. banners) is sold in CPM. If the ad is shown 1000 times the cost will be equal to 1 CPM price. For example, if a publisher charges $10 CPM, that means your ad will be shown 1000 times for $10. If your budget is say $10, 000 then mean your ad will be shown 1, 000, 000 times ($10, 000 *(1000/$10) ).
Total Impressions = (Total Cost or Budget) * (1000/CPM)
If you are trying to find out how much you will pay for a given number of impressions then you can use the following formula
Total Cost = (Total Impressions * CPM)/1000
If you notice in the above calculations, there are no mentions of how many people the ad will be shown to or how many clicks will be generated. CPM advertising is solely based on impressions. In theory if you don’t set a frequency cap (i.e. the maximum number of times one person will see your ad) then you could end up serving all the impression to one person only. (If you would like to know more about frequency cap then drop me a line and we can talk further).
CPC stands for Cost Per Click. Google Adwords made this model popular. Generally search and text advertising is sold by CPC model. In this kind of advertising model you just pay for number of clicks you get on your ads irrespective of number of impressions it takes to generate those clicks. For example, if the CPC is $1.00 and your ad is shown 12, 000 times but gets no clicks then you pay nothing. If you get 10 clicks on your ad then you pay $1.00X10 = $10.00.