Pay-Per-Click describes the most commonly used pricing model for online advertising. As this is the most frequently used pricing model, the terminology is often also used to describe online advertising as a whole. Pay-per-click is also referred to as cost-per-click advertising.
How Does Pay Per Click Work
Pay-per-click means that an advertiser will only pay if their ad is clicked; the price of a click is usually determined by a bidding system where all advertisers will set a maximum cost per click that they are willing to pay.
Who Uses Pay Per Click Pricing
Google AdWords is the largest advertising platform and they use a real time pay-per-click bidding system to manage the different bids from advertisers. AdWords has a comprehensive bidding system that looks not only at the maximum bid but also at the quality score; which is determined by other metrics such as click through rates and the quality of the ad, keywords & the account. The lower the quality score, the higher the maximum cost per click needs to be for their ad to render. Google’s bidding system is designed to ensure that an advertiser won’t need to may more than the minimum for their ad to appear in a certain position.
What Other Pricing Models Are There
Some of the other online advertising pricing models include:
- Cost per impression (CPM) – This is where an advertiser must pay each time their ad is shown.
- Effective cost per impression (eCPM) – This pricing mechanism is when cost per click and cost per impression bids are involved in the same auction. All cost per impression bids will be converted into effective cost per impression bids where the average cost per click will be calculated by multiplying the cost per impression by the click through rate to create a comparable bid value that can be used to bid against the CPC bid.
- Cost per order (CPO) – Cost per order bidding is when an advertiser will only pay if there is an order or purchase made on their website. This pricing mechanism is more difficult to manage as it is contingent on effective tracking being implemented on the website; as well as being effected by the conversion performance of the website.
- Fixed fee pricing – this is where an ad will appear on a site for a specified time, on specified pages or in set locations on a page. The fee will either be a set amount determined by the website or it will be determined through an auction.