Why did the CPMs increase after Apple's ATT policy?

This question is increasingly being asked in the mobile industry: Why is this happening? The Apple Tracking Transparency (ATT) privacy policy has created a digital environment where advertisers find it more challenging to reach relevant customers due to difficulties in ad targeting and data restrictions.

If the targeting efficacy is lower and the campaigns are not generating the results they were generating before, advertisers are probably having a lower return on investment on their campaigns, and the users acquired are not that relevant, resulting in a lower lifetime value, therefore they should be bidding less for iOS inventory and the prices of CPM should be dropping.

But this is not what we are seeing, we don’t see the CPMs getting cheaper, it is happening quite the opposite, they are getting more expensive.

Even Facebook noted that their average price per ad increased by 23% in Q3 of 2021. In the same report but for the Q4 of 2021 when the ATT policy was already operative on a large scale in iOS all over the world, they reported a rise of 6% on the average price per ad.

What could explain this rise of CPM? Well, there are a few theories. 

• The first one, which was mentioned by Facebook is that the digital market is still trying to adjust and adapt the CPM's prices after the COVID. Right after the burst of the COVID pandemic in 2020, there was a decline in the CPMs all over the world since there was a lot of uncertainty about what would happen to the global economy and the companies themselves. Now, according to Facebook, the CPMs are getting back to their pre-COVID prices, even if with the ATT privacy policies Advertisers feel more confident and are getting back to investing heavily in digital campaigns.

• The second explanation is that the advertisers are lowering their margins because of the ATT policy. The need to scale their apps fast and beat the competitors is so crucial that they are shrinking their margins to be able to do that. If a company had a positive return on ad spend before the ATT spread, now they are just reducing their margin but still having profit out of it and growing their active user base which is very important.

• The third explanation refers to the way advertisers are running their campaigns. The CPM metric (cost per mile) at the end is just an accounting of the cost of a campaign and its reach. The cost of CPMs is not set by most of the ad platforms and it’s determined when the auction of the banner impression to the user is made. Apps and performance advertisers are creating more and more campaigns focused on outcomes that are performance-driven like installs or in-app purchases, not focusing on the impressions number. The different objectives of the campaigns and the likeability to convert can raise the CPM price.

Advertisers often bid against each other for the same impressions, each with different campaign objectives based on user actions like clicking, purchasing, or adding to a cart. These campaigns focus on a cost-per-action (CPA) model, where advertisers pay up to the bid price to achieve the desired conversion. The winner of the auction is typically the advertiser with a higher probability of conversion, meaning the user is likely to perform the desired action upon seeing the ad. It's important to note that if no action is taken, the advertiser still pays for the impression, emphasizing the significance of conversion probability.

Most ad platforms use an auction mechanism that considers campaign bid logic and conversion probabilities to determine which ad to serve. With recent changes in the industry, there has been an increase in CPA models across several countries. Previously, algorithms relied on user data to create lookalikes and predict conversion probabilities. Now, with reduced access to such data and limited targeting possibilities, advertisers and algorithms are focusing more on demographic data like gender and age to refine their optimizations and achieve accurate conversion rates.

Although it's unclear which specific factors are driving higher CPM costs, one critical aspect of media buying that demands more attention is the quality of the creatives. Engaging ads can boost campaign conversion probabilities and increase impressions, helping to mitigate the impact of higher CPMs. By maintaining high click-through rates (CTR) and conversion rates (CR), advertisers can continue to grow their apps and user bases despite industry changes.