How Does Pay Per Click Really Work?

By jason on Mar 1, 2011 53 Comments
Online Advertising

Pay per click advertising (or PPC), in short, is an advertising model whereby advertisers only pay when their ad is clicked. Given the competitive state of web advertising, utilizing PPC ads is a skill few modern businesses can afford to ignore. As Google AdWords guru Perry Marshall routinely says, “never before in the history of advertising has it been possible to spend $5, write a couple of ads, and get instant access to over 100 million people in less than 10 minutes.” But while Perry is 100% right, PPC is more than just an opportunity. Not using PPC is actually a threat to your business if web searchers are seeing ads from your competitors but none from you.

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Whether you advertise on Google AdWords, Yahoo! Search Marketing, or the Bing/MSN AdCenter, the following principles will clue you in and get you started:

The Heat of the Moment

(orangeacid)

The basic, underlying principle of pay per click (and why it is so effective) is that you are advertising to people as they search for whatever it is that you have. This is a complete, 180 degree shift in mindset and strategy from other types of advertising. Consider, for example, a form of advertising you are surely more familiar with: TV commercials. The producer of a TV commercial knows that most of the people who see it were not already thinking about his product. His job is literally to overcome everyone’s lack of pre-existing interest in what the commercial is selling.

The PPC advertiser is in precisely the opposite position. He has the tremendous advantage of showing ads only to people who deliberately sought out what he sells. Unless someone sat down at their laptop and typed “Philadelphia personal injury lawyers,” for instance, that person will not see your ad. As you can imagine, simply giving someone what they are already looking for is a lot easier than creating demand from scratch (as most other advertising must do.)

Pay Only For Results

(Search Engine People Blog)

Another key difference between PPC and other forms of advertising is that you only pay for results. A company running TV spots pays for the airtime their commercial uses – whether it causes people to pick up their phones or not. Someone placing a newspaper ad pays for the space his ad fills – whether anyone so much as looks at it or not. With PPC, you only pay when someone clicks your ad. At bare minimum, visitors are taken to your webpage and see your sales pitch while you pay only for that one click.

The amount you pay when someone clicks your ad is known as your Cost Per Click (or CPC).

Your CPC is determined by several factors, including:

  • How many people advertise on the same keywords you do
  • Your Click-Thru Rate (or CTR) which is how often your ads get clicked compared to how often they get displayed
  • “Quality Score” factors like whether the website your ads send people to is relevant to the keyword you advertised on

The factors that go into determining CPC are somewhat complex for the beginner user. To learn more we recommend you take a deeper look into how Google determines CPC on their ad networks.

Laser-Targeted

(jared)

Maximum effectiveness with PPC is all about taking a laser-targeted approach. When designing a billboard ad, what can you validly assume about the people who see it? Other than the fact that they’re driving by at 60 MPH, not much. Thus, billboards use extremely broad messages that could conceivably interest just about anyone. This is known in advertising as “the shotgun at the wall approach.” Fire away and hope it sticks.

Successful PPC ads, once again, do the exact opposite of this.

Instead of showing one ad to everyone, you show different ads to different people. A Volkswagen dealership, for instance, can display one ad to people who look for “2010 VW Golf TDI” and a different one to people who look for “Used 2005 Jetta.” Targeting people within a specific geographic region is also possible. For example, if the same VW dealership only services the Los Angeles metro region, they can display their ads to people searching in the surrounding area.

Unlike the billboard designer, you can gather many important things about your searchers. The fact that someone searched for the keyword they did suggests a certain level of familiarity with the topic, what their intent is, and a set of expectations you can speak to in your ads.

You can even use negative keywords to avoid showing ads to unprofitable searchers. Our hypothetical VW dealer, therefore, would add words like “warranty” and “repairs” to his negative keyword list because no one searching for those things is trying to buy a car.

Systematic & Trackable

(Sterlic)

PPC advertising is extremely systematic and trackable. Unlike, say, billboards (the ultimate in unaccountable advertising), there is no mystery about whether your PPC ads work or not. And if your ads aren’t working, it is usually quite clear why. Bruce Clay offers a visual aid with his “PPC Hierarchy of Needs.”

Essentially, the following rules apply to analyzing why a PPC ad or campaign performs poorly:

  • If people are searching for the keywords you use (use Google Keyword Tool to find out if they are), but are not clicking your ads, there is a gap between what searchers of those keywords want and what your ads say.
  • If people are clicking your ads, but are not taking action when they get to your website (also known as your “landing page”) there is a gap between what your ad promises and what your website delivers.

In short, there must be a logical “flow” that starts with the keywords people type in, continues with your ad copy, and culminates in what is seen on your landing page. If your ads get consistently low CTRs, write better ones. If your landing page does not convert clicks to buyers, get a better sales funnel. The fact that PPC is so systematic and trackable means there is no excuse to continue running ads that don’t perform.

Competitive Bidding

(AMagill)

As noted earlier, your cost per click is established partially by what other advertisers are paying to advertise on those keywords. It is an auction-based pricing system. That is to say, if you tell Google that you’re willing to pay $1 every time someone clicks your ad on the keyword “cheap car insurance quote” and someone else tells Google they’ll pay $2, then, all else equal, their ads will display above yours and be seen more often.

As you will quickly discover, the CPCs you are required to pay for top placement on popular keywords is high–sometimes astronomical. In this case, the only way you can profitably advertise to those searchers is by having a sufficiently high visitor value. Visitor value measures your gross sales per visitor. A higher visitor value means you can pay more to acquire a customer. A car insurance giant like Allstate can spend $5 or $10 per click on insurance-related keywords because if one out of every fifty clicks becomes a $2,000 policy sale, it’s profitable.

When deciding what to bid on various keywords, always bear in mind what those clicks are actually worth: your visitor value. Your ultimate goal is exploiting the Unlimited Traffic Technique (squeezing more profit from each click than anyone else.)

 

  • Vincent Lewis

    Hello, can the ppc technology be use in a Network Marketing Company? It other words can we track the actual number of unique page visits per marketer of by groups of marketers? Example: 4 marketers in a networking structure that have their own webpage that host various stores that want web traffic, and each marketer has his/her own page can we quantify the unique clicks on each marketers page monthly and then pay the group based on the number of combined clicks?

  • Robert

    Here’s a tip, especially for local businesses – it’s called day parting. As in, you schedule your ads only to appear during business hours of the day. If you follow customer trends in clicks and conversions by the hour of the day, you’ll notice the peak hours. You can bully out your competitors on bids by focusing on certain times of the day. Make sure you are constantly optimizing based on these trends. You don’t want to miss your customers, but if you’re on a tighter budget, just wait for ‘the right moment’ of the day and bust out the cannons to hit your prospects when they want you most. I have it all managed for me, so no sweat. Simon can set you up to get managed if you’re interested, just call him at 302-401-4478 .

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