Google Adwords isn’t Really Pay per Click

One of the things that attracts people to Google Adwords is that it is pay-per-click. This means that advertisers only pay when somebody actually clicks on their ad. That seems straightforward enough. However, the way that the bids and cost per click are calculated mean that it is really more like pay-per-impression than pay-per-click. All those occasions when people don’t click the ad still cost you, in the form of higher bid prices for your clicks.

Bid Price Calculation

There are a number of factors that determine what you need to pay for a click. You are bidding against other advertisers, but it isn’t simply the highest bid wins. Google takes into account other factors, in particular the relevance of the ad, the landing page quality and the Click Through Rate (CTR) of the ad.

Including the CTR in the calculation is what makes it more like pay per impression. Everything else being equal, if your click through rate is only half your competitor’s, you have to bid double for the same ad position. If they bid 50c, you have to bid $1 - or $1.01 to beat their bid.

If you work the numbers, you see that the winning bidder is the bidder who gives the best return per ad shown. This maximizes the return for Google - which shouldn’t surprise anyone. Assume your CTR is 1% and your competitor’s is 2%, using a simplified calculation:

Ad revenue = CTR * bid price * 1000 impressions

1% * $1 * 1000 = $10 per thousand impressions
2% * $0.51 * 1000 = $10.20 per thousand impressions

The 51c bid will beat a $1 bid, because it has double the click through rate.

Incorporating the click through rate into the calculation turns it into pay per impression.
People who don’t click on your ad reduce your click through rate and cost you money indirectly.

This is actually good news

This presents a big opportunity to reduce your cost per click.
The technique of targeting the ad to as many people as possible in the hope that they will be interested is expensive. To reduce your cost per click you want to laser target the ad at the people who are actually looking for a product like yours. You want to stop the people who don’t click on the ad from seeing it at all. If you can significantly cut the number of people who see the ad, without reducing the number of clicks, your clicks will be correspondingly cheaper.

Google Adwords provides many ways to control exactly who sees your ad. The most important are negative keywords, careful selection of search terms and targeting languages and locations.

Clicking a competitors ad

This has interesting implications for people who click on their competitors ads to try to use up their ad budget. The clicks will increase their competitor’s CTR, reduce their cost per click, and boost the ad position. Probably not the desired effect. Whether these effects outweigh the cost of the clicks I don’t know, but it certainly mitigates the effect of the invalid clicks.

For some people, it’s really bad news…

While it is good news for people with well known products or solutions which customers actively look for, it is bad news if you are trying to introduce a completely new product. Adwords is designed to advertise to people who are already looking. If people aren’t actively looking for your solution, it is very difficult to effectively target them with Adwords. You will always be at a disadvantage to the people who are producing exactly what they are looking for. In this case, other forms of advertising might work better.