Economics of Pay Per Click Advertising

Pay per click (PPC) advertising has revolutionized advertising on the Internet. This allows for very targeted advertising to Internet users who are searching for the particular item that is being advertised. Google Adwords and Yahoo Search Marketing are the two major PPC programs on the Internet today. Microsoft AdCenter is a recent newcomer to PPC programs.

It is easy to set up an advertising campaign under these programs, but one must be cautious and make good business decisions about the campaign. The intent is to make money rather than pay Google, Yahoo, or AdCenter more than you make.

When evaluating the potential profit from a PPC program, you will only be charged for the times that the user clicks your ad. However, there is another variable that you must consider which is called conversion rate (CR). This is the number of users who click the ad divided into the number of users who actually buy the product. A rough rule of thumb for CR is five (5) percent.

You need to project the economics of the campaign before you launch it. If you have a low cost per click (CPC) and the commission from your affiliate company is high, you can afford a campaign with a low conversion rate. On the contrary, if the commission per transaction from the affiliate company is low, and the CPC is high, you need a conversion rate that is high.

It is a matter of simple math to project the results of a sales campaign.

Profit per click = ($ per sale X Conversion rate) - (Average cost per click)

Let’s plug in some numbers and see how this works. Assume that the selling commission is $5.00, the conversion rate is 5%, and the average cost per click is $.10. Multiply the selling commission ($5.00) by the CR of 5% to get $.25. Subtract the cost per click (CPC) of $.10 from $.25 and you get a profit of $.15. This does not seem like a lot of money, but the Internet is viewed 24/7 so if you have 1000 clicks per month and convert 5% of them, you will make $150 for setting up the campaign and then monitoring it occasionally. If you set up several of these campaigns for different key words, you can make a nice supplemental income.

In summary, always do your homework and make solid assumptions about your campaign. Do the math so you are not surprised by a campaign that costs you money rather than making you money.