# Pay-per-click

Pay-per-click (PPC) is an internet advertising model used to drive traffic to websites, in which an advertiser pays a publisher (typically a search engine, website owner, or a network of websites) when the ad is clicked.[1][2]

The PPC advertising model is open to abuse through click fraud,[4] although Google and others have implemented automated systems[5] to guard against abusive clicks by competitors or corrupt web developers.[6]

## Purpose

Pay-per-click, along with cost per impression (CPM) and cost per order, is used to assess the cost-effectiveness and profitability of internet marketing and drive the cost of running an advertisement campaign as low as possible while retaining set goals.[7] In Cost Per Thousand Impressions (CPM), the advertiser only pays for every 1000 impressions of the ad. Pay-per-click (PPC) has an advantage over cost per impression in that it conveys information about how effective the advertising was. Clicks are a way to measure attention and interest. If the main purpose of an ad is to generate a click, or more specifically drive traffic to a destination, then pay-per-click is the preferred metric. The quality and placement of the advertisement will affect click through rates and the resulting total pay-per-click cost.

## Construction

Cost-per-click (CPC) is calculated by dividing the advertising cost by the number of clicks generated by an advertisement. The basic formula is:

Cost-per-click ($) = Advertising cost ($) / Ads clicked (#)

There are two primary models for determining pay-per-click: flat-rate and bid-based. In both cases, the advertiser must consider the potential value of a click from a given source. This value is based on the type of individual the advertiser is expecting to receive as a visitor to their website, and what the advertiser can gain from that visit, which is usually short-term or long-term revenue. As with other forms of advertising, targeting is key, and factors that often play into PPC campaigns include the target's interest (often defined by a search term they have entered into a search engine or the content of a page that they are browsing), intent (e.g., to purchase or not), location (for geo targeting), device used (e.g. whether the user is searching from a desktop device or mobile) and the day and time that they are browsing.

### Flat-rate PPC

In the flat-rate model, the advertiser and publisher agree upon a fixed amount that will be paid for each click. In many cases, the publisher has a rate card that lists the pay-per-click (PPC) within different areas of their website or network. These various amounts are often related to the content on pages, with content that generally attracts more valuable visitors having a higher cost per click than content that attracts less valuable visitors. However, in many cases, advertisers can negotiate lower rates, especially when committing to a long-term or high-value contract.

The flat-rate model is particularly common to comparison shopping engines, which typically publish rate cards. However, these rates are sometimes minimal, and advertisers can pay more for greater visibility. These sites are usually neatly compartmentalized into product or service categories, allowing a high degree of targeting by advertisers. In many cases, the entire core content of these sites is paid ads.

### Bid-based PPC

The advertiser signs a contract that allows them to compete against other advertisers in a private auction hosted by a publisher or, more commonly, an advertising network. Each advertiser informs the host of the maximum amount that he or she is willing to pay for a given ad spot (often based on a keyword), usually using online tools to do so. The auction plays out in an automated fashion every time a visitor triggers the ad spot.

Advertisers pay for every single click they receive, with the actual amount paid based on the amount of bid. It is common practice amongst auction hosts to charge a winning bidder just slightly more (e.g. one penny) than the next highest bidder or the actual amount bid, whichever is lower.[10] This avoids situations where bidders are constantly adjusting their bids by very small amounts to see if they can still win the auction while paying just a little bit less per click.

In order to maximize success and achieve scale, automated bid management systems can be deployed. These systems can be used directly by the advertiser, though they are more commonly used by advertising agencies that offer PPC bid management as a service. These tools generally allow for bid management at scale, with thousands or even millions of PPC bids controlled by a highly automated system. The system generally sets each bid based on the goal that has been set for it, such as maximize profit, maximize traffic, get the very targeted customer at break even, and so forth. The system is usually tied into the advertiser's website and fed the results of each click, which then allows it to set bids. The effectiveness of these systems is directly related to the quality and quantity of the performance data that they have to work with — low-traffic ads can lead to a scarcity of data problem that renders many bid management tools useless at worst, or inefficient at best.

## History

There are several sites that claim to be the first PPC model on the web,[11] with many appearing in the mid-1990s. For example, in 1996, the first known and documented version of a PPC was included in a web directory called Planet Oasis. This was a desktop application featuring links to informational and commercial websites, and it was developed by Ark Interface II, a division of Packard Bell NEC Computers. The initial reactions from commercial companies to Ark Interface II's "pay-per-visit" model were skeptical, however.[12] By the end of 1997, over 400 major brands were paying between $.005 to$.25 per click plus a placement fee.

In February 1998 Jeffrey Brewer of Goto.com, a 25-employee startup company (later Overture, now part of Yahoo!), presented a pay per click search engine proof-of-concept to the TED conference in California .[13] This presentation and the events that followed created the PPC advertising system. Credit for the concept of the PPC model is generally given to Idealab and Goto.com founder Bill Gross.[14]

Google started search engine advertising in December 1999. It was not until October 2000 that the AdWords system was introduced, allowing advertisers to create text ads for placement on the Google search engine. However, PPC was only introduced in 2002; until then, advertisements were charged at cost-per-thousand impressions or Cost per mille (CPM). Overture has filed a patent infringement lawsuit against Google, saying the rival search service overstepped its bounds with its ad-placement tools.[15]

## References

1. Fjell, Kenneth (2009-03-01). "Online advertising: Pay-per-view versus pay-per-click — A comment" (in en). Journal of Revenue and Pricing Management 8 (2–3): 200–206. doi:10.1057/rpm.2008.39. ISSN 1476-6930.
2. "Customers Now", David Szetela, 2009.
3. Jansen, B. J. (2007) Click fraud. IEEE Computer. 40(7), 85-86. The Pennsylvania State University. (PDF)
4. Shuman Ghosemajumder (March 18, 2008). "Using data to help prevent fraud". Google Blog.