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The Price Isn’t Always Right: Cost Per Click Analysis

Date published: November 19, 2009
Last updated: November 19, 2009

Cost per click (CPC) is part of a larger internet marketing model called pay per click (PPC).

PPC is a practice in which advertisements appear on such results pages contextually; the ads served are directly related to the search keywords entered. Advertisers pay for their ad to appear only when users click the associated link. These contextual ads are often listed as “sponsored links.”

Cost Per Click

CPC is the amount of money the advertiser pays when a visitor clicks the sponsored link to go to the advertisers website.

There is a large number of ad networks and other providers of PPC marketing, although the largest and most popular are Google AdWords, Yahoo! Search Marketing, and Microsoft adCenter.

CPC is determined under either a flat-rate or a bid-based model. Under the flat-rate model, a set charge for each click is agreed upon by the advertiser and the provider in advance. In the bid-based model, each advertiser sets a maximum bid (much like an auction) for how much they are willing to pay when a user clicks their link.

Deciding on Keywords

You may be saying to yourself, “So contextual advertising costs money. I get that. How do I decide how much I should bid on keywords?”

Establishing a bid is the dark magic of sponsored links, and is the most important piece of the puzzle. This is where analytics comes into the picture. To determine an effective CPC bid, you must consider factors such as your overall online advertising budget, your click-through vs. conversion (sales) rate, and the net profit from each sale generated.

Contextual sponsored links are determined by many variables, including geolocation, day and time the user is browsing, and perhaps most importantly the maximum bid set by each advertiser. Simply speaking, if your maximum bid on a particular keyword is lower than your competitor’s, your ad will not be served to the user.

Setting Your Cost Per Click Bid

Much like any other auction, it is possible to overbid and underbid. Setting your CPC bid at an exorbitantly high price point to ensure that your ad will be served over all others may win you clicks and conversions, but if that CPC eats too far into your profit from each conversion you’ve just shot yourself in the foot.

Conversely, if you underbid your ads might never be seen by users. While not receiving any click-throughs means you do not pay for those clicks, it means your competitors are generating clicks and presumably conversions.

What is Your Return on Investment?

So it becomes an art and science of constantly analyzing your contextual ad campaigns for effectiveness and efficiency. In short, how much are you paying and how much are you getting back (return on investment or ROI)?

You can read more details about each provider’s PPC programs on their respective sites:

  • Google AdWords
  • Yahoo! Search Marketing
  • Microsoft adCenter

Coming up, we’ll look at some factors in determining return on investment (ROI) via PPC advertising.

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