Advertising Formulas: 7 Digital Ad Equations Every Marketer Needs to Know

You don’t need to be a genius with numbers to become an awesome digital advertiser…

…but you must be able to follow a few crucial advertising formulas (and use a calculator!).

Data is the driving force behind ~90% of our decisions online (the other 10% comes down to experience, instinct and skill), so it’s incredibly important that you know these formulas and how to use the results.

A fundamental step towards successful digital advertising is split testing. When you test different ad elements against each other, you should use ad formulas to find the winner and optimise your campaigns.Click To Tweet

In the rest of this article, I’m going to highlight 7 fundamental advertising formulas and how you can use them to steer your campaigns in a winning direction.

Let’s get into them…

CPC Formula (Cost-per-click)

cost per click

CPC Formula:

CPC = Advertising Spend/Number of Clicks 

CPC Example:

I spend £100 on digital ads and generate 1000 clicks. My CPC is therefore 10p.

100/1000 = 0.1

CPC Definition:

CPC (cost-per-click) refers to the amount spent on a digital ad per (mouse) click from its audience.

The lower your CPC the better your ad, the more targeted your audience and the better your timing.

Every ad you run should aim to create action in your target audience. This action can be measured in ‘Clicks’.

However, high CPC doesn’t necessarily represent a poor ad. If you’re running a conversion campaign, your ads might have a high CPC but high conversion rates too (which will mean they’re a success).

CPC is the best metric to use for ads that are aimed at driving high volumes of traffic, not conversions or engagement (learn more in our guide to Facebook Ad Campaign Objectives).

Conversion Rate Formula   

conversion rate

CR Formula:

Conversion Rate (%)= (Number of conversions/Number of clicks) x100

CR Example:

200 people click on my ad and I generate 25 conversions from these visitors. My Conversion rate is 12.5%.

(25/200) x100 =12.5%

CR Definition:

Conversion rate is the percentage of people who take your offer after seeing it.

Your conversion rates demonstrate the quality of your landing page, the strength of your offer and how appropriate your audience is (for your ad’s offer).

Creating ads that generate clicks means nothing if you aren’t able to convert them on your landing pages.

In order to optimise your conversion rates, make sure that you’re targeting people at the appropriate point in their relationship with you. You can do this by retargeting people as custom audiences after they have already interacted with your brand/website/posts/offers.

You can also increase conversion rates by ensuring that your landing pages and ads are consistent, you’re using social proof and FOMO, to name a few examples.

CTR Formula (Click Through Rate)

click through rate

CTR Formula:

CTR (%)= (number of clicks/number of impressions) x 100

CTR Example:

5000 people see my link and 1000 of those click on it. My CTR is 20%.

(1000/5000) x100 = 20%

CTR Definition:

CTR shows the percentage of people who click on your CTA/link/offer, after seeing it.

Your click through rate demonstrates the power and appropriateness of your CTA (call to action).

Although CTR isn’t always used in digital advertising, it is a crucial formula when understanding the strength of retargeting (e.g. clicks on cart abandon emails) and broadcasts.

Think of CTR like this, the number of people who see your offer and the percentage of those who decide to find out more about it.

The higher your CTR, the more successful your ad’s CTA (or link placement) and target audience.

CPM Formula (Cost Per Mille) 

cost per mille

CPM Formula:

CPM= (Ad spend/Impressions) x1000 

CPM Example:

I spend £21 on an ad that 3000 people see. This means that my CPM is £7.

(21/3000) x1000 = £7

CPM Definition:

CPM (Cost per mille) tells you how much you have paid for a thousand people to see your ad.

BTW: Mille is a Latin word for thousand e.g. millennium or millipede

As the digital world allows advertisers to show ads to people for very little (per impression) and we can track every single ad impression, your CPM is a great measure of how expensive an ad is.

As you’d expect, the CPM varies across platforms and your ad’s success (learn how to prime your ads for the Facebook ad algorithm).

This formula is best used by brands who are hoping to increase their awareness and exposure online, as it does not track actions, conversions or clicks.

CPA Formula (Cost Per Acquisition)

cost per acquisition

CPA Formula:

CPA =Ad spend/Total Acquisitions

CPA Example:

I spend £50 on a digital advertising campaign that acquires 100 leads. My CPA is 50p.

50/100 = 0.5

CPA Definition:

CPA denotes how much an advertiser has spent to achieve EACH conversion (aka acquisition).

A conversion doesn’t necessarily refer to product sales, CPA can also be used for leads (like the example above).

The CPA doesn’t take into account impressions or clicks and works completely on the productivity of your ad spend.

CPA is a critical metric for anybody running conversion campaigns with the aim of generating leads or sales.

ROI Formula (Return on Investment)  

return on investment

ROI Formula:

ROI= (Total Revenue – Total Cost)/ Total cost

Or

ROI as a percentage (%)= (Total Revenue – Total Cost)/Total Cost (x100)

ROI Example:

I spend £200 on ads that generate £600 in product sales. My ROI is £2 for every £1 spent, or 200% (if you want to see ROI as a percentage).

(600-200)/200=2

Or

(600-200)/200(x100)=200%

ROI Definition:

ROI shows an advertiser how much they are returning for every £ (or $) spent on ads. This can also be shown as a percentage.

ROI is a crucial metric for advertisers who are running conversion campaigns.

Ad campaigns that are created to acquire leads or customers, but don’t return an advertiser’s spend (by at least breaking even) will lose money.

ROI is a formula that can be used and transferred into any element of business where money is spent, making it crucial in all aspects of marketing, not just advertising.

ROAS Formula (Return On Advertising Spend)

return on ad spend

ROAS Formula:

ROAS = (Total Revenue from Advertising/Total Ad Spend) x100

ROAS Example:

I spend £1000 on Facebook ads and make £3000 in sales. My ROAS is 300%.

(3000/1000) x100 = 300%

ROAS Definition:

ROAS shows an advertiser how much they are returning (in terms of revenue) on their advertising spend.

ROAS is another crucial metric when measuring the quality of a conversion campaign.

Although ROI is similar, ROAS is much more tactically specific to advertising, and it can be made even more specific for each advertising channel.

To demonstrate this, we’ve made a ROAS calculator that specifically shows a FB advertiser how much they stand to make from their Facebook ads.

Check it out to measure the success of your FB campaigns, before (or after) they’ve even started!

Conclusion

When used correctly, the 7 formulas in this guide can help direct and dictate the success of your campaigns.

You should be running split tests and allowing your ads enough time (usually a week) to gather a reliable amount of data before using these formulas.

The answers will tell you which campaigns to back and which to kill, making these formulas crucial to your success.

Just remember to match the correct metric with the correct ad objective.

Want to learn more digital advertising secrets? Check out: 

Director of Content at Einstein Marketer
Josh is an award winning content marketer and the Director of Content at Einstein Marketer, previously working as a content manager, freelance copywriter and marketer. He writes, edits, proofs and strategises content for Einstein Marketer's agency and their clients, sharing the most successful tactics and strategies with his lovely audience. He hates writing in the third person, follow him on the social links (above) so he can get back to writing as himself.

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