How Does Pay Per Click Work?

In short, “pay per click” is an Internet advertising model where advertisers only pay when their ad is actually clicked. Typically, advertisers will bid on keywords or phrases relevant to their target market. PPC can also use the “affiliate” model, where financial incentives (a percentage of revenue) are offered to affiliated partner sites that host the ads. Google Content Network is a good example of this. The system is actually pay-for-performance as far as affiliates are concerned; if they don’t generate clicks or impressions, there’s no cost to the merchant. Sponsored links will show up next to or above organic results on search engines, along with relevant content or search results. Thus, the actual cost per click will vary according to the demand for the keyword and the search engine itself (pricing models differ). Google and others have automated systems to head off abusive clicks from competitors and other types of click fraud.

FLAT-RATE PPC
On a flat-rate PPC setup, the advertiser and publisher arrive at a fixed amount that will be paid per click. Usually the publisher will have a rate card for cost-per-click. It’s a common setup for comparison-shopping engines, with sites that are compartmentalized into narrower categories. Page content that generates more traffic and more valuable, interested visitors will generally have a higher cost per click than more esoteric or obscure content. Sites such as Shopping.com, Bizrate.com and Pricegrabber.com use this method.

BID-BASED PPC
Bid-based pay per click has advertisers competing with each other for keywords in an advertising network. The auction is done online in an automated system, with each advertiser having set a top-dollar amount that he is willing to pay. The auction takes place according to how many times an ad spot is part of a search engine results page, whenever users are looking for the given keyword. Factors like ad quality and relevance often figure in as well.

Publishers and advertising networks also place ads on 3rd-party properties in a “content network.” Ads on content networks are referred to as contextual ads, as they are placed on pages that have relevant keywords on them. As third parties sign up to host ads, they receive a portion of the ad revenue, which can range from 10% to 30% of the gross revenue for the ad. Ads on content networks (which can also include newsletters and emails as well as websites) have a lower click-through and conversion rate, and are generally cheaper and have less value. So, advertisers pay on each click, with the auction setting the actual amount paid.

Automated bid management systems are usually deployed, with the system taking into account goals such as maximizing profit and traffic. Bid management systems are tied to the quality and amount of data they have available to them — low-traffic ads have a scarcity of data that can make bid management difficult to near impossible.

The most effective Pay per Click Strategy is reviewing the data carefully and making optimizations based on keyword research, trends, goals and conversions. The keywords, ad text and landing pages must be all relevant for optimum conversion rates and ROI. While third party software and automated systems have some usability, the human factor is very important with PPC.

If you seek effective results and positive ROI from your PPC Campaign, contact us.

May 6, 2010

Written by Duran Inci

Duran Inci is a Digital Marketing Executive with over eleven years experience in e-business, including Content Marketing, Paid Search, Ecommerce Systems and Integrations. As Co-Founder and COO of Optimum7, Duran has developed sophisticated processes resulting in leading-edge execution of marketing strategies. Combined with his strong leadership of the Optimum7 team, Duran has successfully generated many millions of dollars in revenue for his clients. His strong analytical skills consistently result in businesses meeting and exceeding online business objectives. Duran has taught a Digital Marketing Bootcamp at Florida International University for the School of Journalism and Mass Communications. He also hosts workshops at South Florida Universities such as FIU (Florida International University), AIU (American Intercontinental University), UM (University of Miami) and various universities in Europe. He's also very active in the development of South Florida IT Cluster and planning. 

Duran has been a featured speaker at various SMX, eMetrics, eMarketing and SES Conferences.

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