How Pay Per Click Advertising Work

Posted on 27. Sep, 2009 by Trond in Google Adsense

Pay per Click (PPC) advertising is an internet marketing platform where an advertiser pays for site traffic by working with a third party advertising network like Google AdWords, Yahoo! Search Marketing, and MSN adCenter. The process starts with the advertiser selecting specific keywords that visitors might use when searching for a product online. An ad campaign is designed around the selected keywords. The advertising network then negotiates the cost of launching this ad with the advertiser. Specifically, a price is assigned to every keyword used in the ad, and the cost is charged by visitor click, or cost per click (CPC). This means that when the ad is clicked on and opened by the visitor, a cost is tabulated and charged back to the advertiser. In essence, the advertiser is being charged for running the ad on a pay per (visitor) click basis.

PPC ad CPC rates may be adjusted and purchased using either flat-rate or bid-based formats. With the flat-rate format, the advertising network presents the advertiser with a layout (also known as a rate card) of the search engine results page (SERP) or other web content page. On this page, distinct areas are outlined and priced accordingly, with higher priced areas receiving more traffic and click-throughs than lower priced areas. The advertiser selects an area based on its price and traffic pattern, and may even negotiate for a better price based on the duration of the ad.

With the bid-based format, advertisers select a keyword and place a maximum bid price on it. An auction commences, and the price of the keyword is raised every time a web visitor inputs that selected keyword into a search engine. Bid-based CPC auctions may result in one, two, or even more winners. The resulting PPC ads are placed in different locations of the SERP or web page, with the winners taking the most prominent spots of the page. Bid winners may also have their PPC ads displayed more frequently.

Many factors determine the CPC rate of a PPC ad. Some of these factors include the type of keyword on which the ad is based, the revenue that can be expected from a particular keyword, and advertiser competition. For example, a keyword like “mortgage” is more likely to be input into a search engine than “mortgage rate changes in Iowa”. Also, because a mortgage is a high revenue item, there will be significant advertiser competition for that word, resulting in a high CPC rate.

Another factor in CPC rate is the Quality Score. The Quality Score is used by search engines such as Google and Yahoo! to determine the value of a PPC ad. Scoring is determines by several variables, such as the relevance of a keyword to its related PPC ad, the click-through rate (CTR) of the ad, and the fit of the landing page to the PPC ad. These variables are input into a proprietary algorithm, and the resulting value is multiplied by the advertiser’s maximum CPC bid. If the Quality Score is strong, the CPC rate will be low, and vice versa. This creates a strong incentive for advertisers to optimize their ads and create landing pages with relevant content. This also results in an improved search engine use experience for web visitors. Web users who find the exact content for which they are searching are in turn more likely to purchase the advertised product and use that particular search engine again in the future. Thus, optimized PPC ads create a positive feedback loop for the advertiser, the web visitors, and the advertising network.

PPC advertisers may extend their marketing reach by working with affiliate marketers through affiliate networks such as Google AdSense and Share-A-Sale. Affiliate marketers post PPC ads on their own web sites and/or blogs. When a user clicks on and makes a purchase through the ad, a portion of the revenue is channeled to the affiliate marketer. Advertisers may also work directly with affiliate marketers, thus increasing the profit margin for both parties.

One detraction from PPC advertising is its risk of click fraud. Affiliate marketers might click on PPC ads in order to generate revenue for themselves. Competitors may click on the ads in order to deplete an advertiser’s budget. To combat this problem, many advertising networks have implemented special fraud and tracking software to protect against false clicks and/or sales leads. Advertisers are also encouraged to perform daily or weekly monitoring of click origin geography, time of day, and even IP address.

Despite the risk of fraud, there are still many advantages to PPC advertising. First of all, the advertiser receives targeted web traffic that is based on product interest. The ad is not charged per web page impression, but only when a visitor actually clicks on the ad. PPC advertising provides a useful testing medium for advertisers trying to find out which keywords are best for driving traffic to their web sites and increasing CTR. Finally, for an advertiser unable to better design a business web site through search engine optimization (SEO), PPC ads provide a convenient alternative for attracting customers and increasing sales.

Related posts:

1. Advertising Online – The PPC
2. Google AdSense Tips – Going Beyond the Basics
3. Highly Profitable SEO Keyword Rich Websites, And Why They Work
4. Google AdSense Tips – The Importance of Proper Placement
5. How to Get Started with Google Adwords

Tags: Advertising Networks, Affiliate Marketers, Google Adwords, Make Money Online, MSN adCenter, Pay Per Click, PPC, PPC Ads, PPC Advertisers, PPC Advertising, PPC Marketing, Quality Score, Yahoo! Search Marketing