How Pay-per-Click Works
How Pay-per-Click Works
Pay-per-click marketing is an advertising method that allows you to buy search engine placement
by bidding on keywords or phrases. There are two different types of PPC marketing.
In the first, you pay a fee for an actual SERP ranking, and in some cases, you also pay a per-click fee
meaning that the more you pay, the higher in the returned results your page will rank.
The second type is more along true advertising lines. This type of PPC marketing involves bidding
on keywords or phrases that appear in, or are associated with, text advertisements. Google is probably
the most notable provider of this service. Google’s AdWords service is an excellent example of
how PPC advertisements work, as is shown in Figure 5-1.



Determining visitor value
So the first thing that you need to do when you begin considering PPC strategies is to determine
how much each web-site visitor is worth to you. It’s important to know this number, because otherwise
you could find yourself paying far too much for keyword advertising that doesn’t bring the traffic
or conversions that you’d expect. For example, if it costs you $25 to gain a conversion (or sale)
but the value of that conversion is only $15, then you’re losing a lot of money. You can’t afford that
kind of expenditure for very long.
To determine the value of each web-site visitor, you’ll need to have some historical data about the
number of visitors to your site in a given amount of time (say a month) and the actual sales numbers
(or profit) for that same time period. This is where it’s good to have some kind of web metrics
program to keep track of your site statistics. Divide the profit by the number of visitors for the same
time frame, and the result should tell you (approximately) what each visitor is worth.
Say that during December, your site cleared $2,500. (In this admittedly simplified example, we’re
ignoring various things you might have to figure into an actual profit and loss statement.) Let’s also
say that during the same month, 15,000 visitors came to your site. Note that this number is for all
the visitors to your site, not just the ones who made a purchase. You divide your $2,500 profit by
all visitors, purchasers or not, because this gives you an accurate average value of every visitor to
your site. Not every visitor is going to make a purchase, but you have to go through a number of
non-purchasing visitors to get to those who will purchase.
Back to the formula for the value of a visitor. Divide the site profit for December ($2,500) by the
number of visitors (15,000) and the value of your visitors is approximately $.17 per visitor. Note
that I’ve said approximately, because during any given month (or whatever time frame you choose)
the number of visitors and the amount of profit will vary. The way you slice the time can change
your average visitor value by a few cents to a few dollars, depending on your site traffic. (Also note
that the example is based on the value of all visitors, not of conversions, which might be a more valid
real-life way of calculating the value of individual visitors. But this example is simply to demonstrate
the principle.)
The number you got for visitor value is a sort of breakeven point. It means you can spend up to
$.17 per visitor on keywords or other promotions without losing money. But if you’re spending
more than that without increasing sales and profits, you’re going in the hole. It’s not good business
to spend everything you make (or more) to draw visitors to the site. But note the preceding italicized
words. If a $.25 keyword can raise your sales and profits dramatically, then it may be worth
buying that word. In this oversimplified example, you need to decide how much you can realistically
spend on keywords or other promotions. Maybe you feel a particular keyword is powerful
enough that you can spend $.12 per click for it, and raise your sales and visitor value substantially.
You have to decide what profit margin you want and what promotions are likely to provide it. As
you can see, there are a number of variables. Real life is dynamic, and eludes static examples. But
whatever you decide, you shouldn’t spend everything you make on PPC programs. There are far
too many other things that you need to invest in. Popular keyword phrases can often run much more than $.12 per click. In fact, some of the most
popular keywords can run as much as $50 (yes, that’s Fifty Dollars) per click. To stretch your PPC
budget, you can choose less popular terms that are much less expensive, but that provide good
results for the investment that you do make.
Putting pay-per-click to work
Now that you have your average visitor value, you can begin to look at the different keywords on
which you might bid. Before you do, however, you need to look at a few more things. One of the
top mistakes made with PPC programs is that users don’t take the time to clarify what it is they
hope to gain from using a PPC service. It’s not enough for your PPC program just to have a goal
of increasing your ROI (return on investment). You need something more quantifiable than just
the desire to increase profit. How much would you like to increase your profit? How many visitors
will it take to reach the desired increase?
Let’s say that right now each visit to your site is worth $.50, using our simplified example, and your
average monthly profit is $5,000. That means that your site receives 10,000 visits per month. Now
you need to decide how much you’d like to increase your profit. For this example, let’s say that you
want to increase it to $7,500. To do that, if each visitor is worth $.50, you would need to increase
the number of visits to your site to 15,000 per month. So, the goal for your PPC program should be
“To increase profit $2,500 by driving an additional 5,000 visits per month.” This gives you a concrete,
quantifiable measurement by which you can track your PPC campaigns.
Once you know what you want to spend, and what your goals are, you can begin to look at the different
types of PPC programs that might work for you. Although keywords are the main PPC element
associated with PPC marketing, there are other types of PPC programs to consider as well.