by Greg Ives - KeywordRanking.

Many marketers pull their hair out because of the rising costs per click of their pay-per-click campaigns. While rising costs are certainly something to consider they should not be the sole measure of a campaign's success.

And the fact of the matter is that CPCs are only going to rise in price as more marketers come online (and they will - analysts predicted $12.3B in online sales for 2005, with spend to reach $26B by 2010).

This makes it vital that you track your campaigns along other key metrics such as return on ad spend and cost per acquisition.

That said, let's take a look at cost per click and see how it relates to a healthy and profitable PPC campaign.

What is CPC?

CPC is the amount that you pay search engines and other internet publishers for one click on your ad that brings one visitor to your website.

How is CPC measured per engine?

Google- Actual CPC in Google is derived from a relevancy formula. The higher your CTR, the lower your CPC.

AdWords is designed to reward relevance.
AdRank = CTR X Max Bid (CPC)

1. Minimum of 1,000 impression/keyword for reliable data
2. CTR for new keywords (<1,000 impressions) is blended with historical performance of that keyword on Google
3. CTRs are normalized for position (since higher positions get higher CTR)
4. Only CTR from Google.com used in equation (not content or syndication)

Example of Google Ad Discounter:

Advertiser A must pay a CPC that will give him a calculated rank equal to 0.65 (Advertiser B’s rank):
Actual CPC to be in Position 1 = Advertiser B's Rank / Advertiser A's CTR
Actual CPC = 0.65 / 1.8%
Actual CPC = $0.36
Advertiser A Pays: $0.36

Next, look at the advertiser in Position 2: Advertiser B
Advertiser B must pay a CPC that will give him a calculated rank equal to 0.38 (Advertiser C’s rank):
Actual CPC = Advertiser C's Rank / Advertiser B's CTR
Actual CPC = 0.38 / 1.0%
Actual CPC = $0.38
Advertiser B Pays: $0.38

Yahoo- Price point/auction-style bidding allows you to determine CPC based on paying one penny more than another advertiser below you in positioning. Here is an example of how Yahoo ranks each advertiser by bid amount:

When is lowering your CPC important?

Lowering your average CPC is important when you can actually get more clicks for the same amount of budget. This is not always the case, and often simply lowering your CPC can have a dire effect on your conversions.

In the interest of keeping your costs manageable, here are a few ideas for either decreasing costs or increasing conversions:

1. Manage bids at the keyword level instead of category or Ad Group level.
2. Choose relevant, targeted keywords to add into your PPC campaigns.
3. Google tip: Use broad, phrase, and exact match versions of the same keyword and compare stats.
4. Build targeted creatives to improve CTRs. The keyword should be present in ad title and description at least once. Use unique selling propositions to attract visitors.
5. Yahoo tip: Make sure the ads do not get truncated in yahoo and MSN depending on the position of the ads. The ads on the right rail truncate at 70 characters for the body.
6. Content: Place in separate Ad groups for ease of bidding and tracking return on ad spend (ROAS).

When is raising your CPC important?

Raising your average CPC can be important if you want to establish a desired position during a cross-promotional time for branding purposes.

CPC’s often increase when an advertiser is looking to scale their PPC campaigns based on a specific performance target. The second position for a keyword may be bidding at $.50/click and the sixth position may be bidding at $.35/click but the second position provides better traffic quality, ROAS or CPA.

Finding the desired CPC for each keyword based on individual performance targets is essential in order to optimize your PPC campaigns.

How can you increase your ROAS or decrease your CPA?

It's not only about lowering your CPC, it's about improving your cost-per-conversions (CPA/CPO) and/or return (ROAS).

In order to lower your average CPC, you will probably have to add additional keywords that may or may not be better converting keywords or lower your max CPC which lowers your positioning generating less visibility.

For a better understanding of improving your conversions and decreasing your costs, read "Decreasing Your Paid Search Costs".

Example of a Conversion Comparison Test

My advice: get smarter with your PPC campaigns so you are not left with an empty feeling in your stomach and no hair to comb in the morning.

Greg Ives is the Paid Search Director for Websourced's KeywordRanking.

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