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Pay Per Click

Updated on March 19, 2024
Article byPallabi Banerjee
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Pay Per Click?

Pay per click (PPC) is a method of product promotion using the internet in which an advertiser places a link on an online platform, primarily a search engine. Then, the advertiser pays the online platform only when someone clicks on the link. PPC is also called cost per click (CPC).

Pay-Per-Click (PPC)

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The internet platforms used for this model are Google Ads, Bing Ads, Microsoft Ads, Amazon Ads, etc. It helps in drawing traffic to a website. This concept relates to digital marketing, where advertisers can promote products and services within a measured budget to genuine target consumers. It is also a good source of income for search engines.

Key Takeaways

  • Pay-per-click marketing is a product promotion technique in which websites advertise their products and services in various search engines.
  • The search engines get paid only when a prospective target customer clicks on the link.
  • It is also called the cost per click from the search engine’s standpoint since it charges the advertiser based on the clicks.
  • The websites can use this model for driving traffic within a limited and planned budget which helps in saving costs as well as reaching out to relevant customers.

How Does Pay Per Click Work?

Pay per click advertising is an approach for websites to market their goods and services using search engines and to pay them depending on the number of clicks. It is the best way to draw the attention of prospective customers and increase sales within an estimated budget.

Keyword research is a prerequisite for this model because pay per click marketing will only work when someone uses a relevant keyword to search for those goods or services that the advertiser has to offer. Therefore, product promotion must be done using keywords that customers mainly use to look for what they want.

This process starts with understanding the target audience. Suppose a company needs to identify the correct market where the product should be focused. In that case, it also becomes challenging to search for suitable keywords that will make the pay per click campaign successful.

This form of advertising helps the seller or advertiser, the buyer looking for valuable products, and the publisher of the link or search engines. Sellers get customers genuinely interested in discovering more about the offer and, perhaps, purchasing it if found suitable. The buyer can save time searching and selecting goods and services that best match their requirement. Publishers use it as a primary source of revenue because online platforms like Google and social media platforms like Facebook can earn money when people use them to search and make purchases. Their services are otherwise free.

The pay per click campaign works best if the advertisements are placed on the first pages of the publisher’s site or rank at the top of the search engines like Google or Amazon. Then, they have the highest chance of getting clicked and converted into sales.

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Formula

Let us understand the formula used to calculate pay per click.

The payment for this advertising method is determined in two ways:

  1. The first method is paying a pre-decided amount which is a fixed cost. It depends on the advertisement’s content, the terms and time frame of the contract, and the type of customers.
  2. The second method is auction-based, where bidding is done to secure the best spot on the website, depending on the number of clicks.

Let us calculate the cost per click incurred in the process by dividing the total cost incurred for the promotion by the number of times it is clicked. 

Thus,

CPC = Total cost incurred/number of times the ad is clicked

It is also essential to understand how much return on investment (ROI) the seller gets from the process.

ROI = [(Revenue – Cost) / Cost] x 100.

Calculation

Let us understand the calculation of PPC.

Here, it is important to understand that payment should be increased to get more traffic for the ad because more clicks mean less cost. If an advertiser pays $50 per month to secure a spot on a website for product promotion and two people click on the advertisement per month, then the cost is as follows:

Cost per click = 50/2 = $25

Now, if ten people click on the advertisement per month, then the cost is as follows:

Cost per click = 50/10 = $5

We observe that the cost decreases drastically if the number of clicks increases through quality ads and proper keywords combined with a clear idea about the target market. Thus, if the number of clicks is more, the seller should pay more to take advantage of the situation.

Many online calculators are used to calculate the above to serve the purpose.

Examples

Here we look at some examples of pay per click or cost-per-click.

Example #1

A perfume-producing firm, SweetSmell Ltd, manufactures different varieties of perfumes targeting customers who are frequent travelers and party-goers. They are the ones who use perfumes the most, and the company has the best chance of achieving the sales target from them.

SweetSmell Ltd decides to use the google pay per click strategy to reach out to the target users. It hires the best digital marketing team to research relevant keywords. It also hires an advertising team who are experts in creating exciting ads to reach the audience. Thus, some catchy photos and videos are created with interesting taglines and uploaded to the google search engine.

The link gets many clicks every month, and many visits convert to successful sales. Holiday and festive seasons are getting the highest number of customers since, during those times, people are engaged in both traveling and partying.

Thus, if the right kind of customer selection and proper online advertising is done through the use of suitable keywords, especially the long ones, which are more descriptive, then a company can increase its annual turnover to a great extent.

Example #2

According to a survey, the pay per click advertising cost has shot up for most sectors. It is reported that the increase has hit 91% of the industries. The survey has been conducted on 79 thousand advertisers who use the google pay per click strategy to make sales.

The sectors like entertainment, travel, and furniture have increased considerably. On the other hand, insurance and financial products have seen a fall in cost. The main reason behind this change can be inflation, which has led to rising prices, and thus consumers are spending less. In addition, post-pandemic, people are staying less at home, which has reduced the tendency to do online shopping.

The sales conversion rate has decreased because keywords need to target the right customers. Even the level of competition is increasing, which prompts raising the budget level, using better keywords and competition analysis.

Advantages And Disadvantages

The PPC process has some advantages and disadvantages, as follows:

Advantages

  • Cost savingIt offers a marketing method that saves costs for the advertiser because it will pay the search engine only when someone clicks on the link. Thus, the expense is incurred only when the website connects to a user.
  • Precise return calculationSince the seller can plan the investment and calculate the cost incurred, the return calculation is also very transparent.
  • Quickly effective The campaign is effective immediately because almost everyone worldwide accesses the internet and search engines.
  • Easy to identify target market With carefully coordinated analysis, it is possible to identify the target market quickly.
  • Easy trainingIt is easy to understand the concept and steps with the help of numerous online training courses.
  • Customization possibleAt any stage of the promotion process, it is possible to make changes in keywords or advertising strategy to remain up to date in the market.
  • Total control The advertiser controls the action, and no one else can interfere.
  • Low investmentThe initial investment is meager, and it is possible to continue the campaign as long as the budget permits.

Disadvantages

  • Site optimization The website and the advertisement has to be updated, and frequent change in keywords and ad designs need to be done to improve the traffic, which is time-consuming.
  • Clicks do not mean salesEvery time someone clicks on the ad does not mean sales are made. People sometimes visit to check things out, not with the purpose of buying.
  • Marketing knowledge is a must Without proper marketing or keyword analysis knowledge or knowing how to target the right market, it is difficult to achieve desired results.
  • Highly competitive Digital marketing is highly competitive, and the cost is rising daily. Therefore, investment is necessary to tackle the competition and train the staff to optimize the process and tackle inflation.

Pay Per Click vs Cost Per Click vs Pay Per Impression

In pay per click, the seller pays the publisher only when a prospective buyer clicks on a sales promotion. The cost per click is a measure of the cost incurred for promotion. Pay per impression is the payment for every 1000 times the ad is displayed on a site. First, however, let us compare them with each other.

Pay Per ClickCost Per ClickPay Per Impression
The advertisers make this payment for promoting their products.  It measures the cost incurred by the seller to promote a product or service online.It is the payment made for every 1000 displays of the advertisement.
The payment is made based on the number of clicks. Cost is calculated by dividing the total cost by the number of clicks. It is a fixed payment irrespective of the number of clicks. 
It increases with the rise in clicks. It decreases with the rise in clicks. It increases the chance of the advertisement remaining visible.
It gives an idea about the number of viewers.  It gives an idea about the success rate of the campaign.It gives an idea of whether the concerned product is in demand. 
PPC helps in setting a budget. CPC helps in determining the effectiveness of the PPC. It helps in creating awareness about the product or service.
It depends on the product type, location on the web page, and budget.It depends on the number of clicks, the total cost of the campaign, and other strategies like keyword research and ad quality.It depends on the advertiser’s budget and the goal, which is awareness or sales. 

Frequently Asked Questions (FAQs)

1. What are the primary models for determining pay per click?

The primary models used for this purpose are:
1. Flat-rate model – The seller or advertiser pays a pre-decided amount for every click. Payment depends on which part or content of the ad is more costly (likely to get more customers) and which part is less costly (sale conversion is less likely). High-value or long-term contracts usually get discounts. 
2. Bid-based model – This is an auction where the seller has to bid for a spot to advertise the products. The auction gets triggered when a visitor clicks on the commercial. The highest bidder secures the spot, depending on the money and content.

2. Are facebook ads pay per click?

Yes, Facebook ads are PPC. It is a great place to launch a campaign since it is widely used. It also helps target the right market because our posts and comments tell Facebook about our preferences, which allows the advertiser to connect to the right customers based on interests, age, gender, connections, etc.

3. Does pay per click really work?

Yes, this product promotion method works. However, criteria like a quality advertisement, thorough keyword research, and proper market study are essential to get the desired result.

This article has been a guide to what is Pay Per Click. Here, we explain its formula, calculation, example, advantages, and disadvantages. You may also find some useful articles here –

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