How do CPC and CPM ads compete with each other?

Cost-per-click (CPC) and cost-per-thousand impressions (CPM) ads compete in the same auction. Neither type of ad has a special advantage over the other.

Because the two pricing systems are different, AdWords uses a system of effective CPM, or eCPM (an equivalent impression-based Ad Rank for ads with CPC) to compare and rank them whenever they're in competition with ads with CPM.

For cost-per-click (CPC) ads, the AdWords dynamic ranking system considers the bid, clickthrough rate (CTR), and other relevance factors, all taken across 1000 impressions. The resulting figure is the ad's eCPM, or effective cost per 1000 impressions.

For any available ad position, the eCPMs of cost-per-click ads are compared to each other and to all CPM ads. The highest-ranking ad wins the position and is displayed to the user. Image ads and CPM text ads must beat the sum of all eCPMs of the other ads that would have appeared. When a CPC ad is displayed, it is charged only if the user clicks on the ad. A CPM ad is charged for an impression whether clicked or not.