The formula for CPM is as simple as the concept behind it. Since CPM is the cost per thousand impressions, then you simply divide the cost by the number of impressions divided by a thousand. So the CPM formula is CPM = 1000 × cost / impressions. What may interest you more is one of the reversed equations:
-
For cost (how much you'll have to pay):
cost = CPM × impressions / 1000
-
For impressions (how many impressions you're going to get, given your budget):
impressions = 1000 × cost / CPM
The CPM model has the virtue of being very simple (in all regards – how easy it is to understand, implement, and bill) and clear to all parties.
It has its disadvantages, though. It's loosely tied to value, so advertisers can't be sure how much value they're getting. It's hard to tell how well the traffic will convert and no CPM calculator will tell you that. You get a bit closer if you're basing the remuneration on clicks (the CPC - cost per click model). Then you pay for the actual traffic you're getting and it's up to you how much value you'll extract out of it.
Even less risky is the CPA (cost per action) model, where the advertiser pays every time the user performs an action (registers, makes a purchase, etc.). It's risky for the publisher, though, because they have to rely on the advertiser's ability to monetize the traffic.
💡 If you own a website and wonder how much revenue it could generate by showing ads, check out the website ad revenue calculator.