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 prob- ably the most notable provider of this service. Google’s AdWords service is an excellent example of how PPC advertisements work.

PPC advertisements are those advertisements that you see at the top and on the sides of search pages.

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 other- wise you could find yourself paying far too much for keyword advertising that doesn’t bring the traf- fic 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 num- bers (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 itali- cized 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 realisti- cally 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 dif- ferent 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.