“How much do I have to pay, what does it cost, my keywords are HOW much?” These are all common questions we get when speaking to new AdWords advertisers getting ready to set up accounts.
They have yet to understand that CPC (cost per click) is only one of many metrics used to determine account performance. But, it’s a big one so let’s look at it more carefully.
Your Max CPC (cost per click) is the maximum you are willing to spend for a click for a keyword or group of keywords. Max CPC’s can be set at the Keyword level or at the Ad Group level.
Determining how much you will actually pay for a click, in advance, is not really possible. Actual CPC is calculated EVERY time ads are shown and are dependent on many different things including Quality Score; Ad Relevance, Historical Performance, Ad Rank, and more.
However, we show you the following slide and example to help you understand how Actual CPC is calculated on the back end and just give you a better understanding of it visually.
In this example, we have Scott, Alison and Jon. We notice that Jon is a big shot looking to spend more than double the other advertisers. His $2.35 bid far exceeds that of Scott and Alison who are only willing to pay $1.00 each for the clicks on their ads.
Many people may think that because of this, Jon wins the coveted 1st position in an Ad Auction. This is not the case. Your Ad’s Position, or Ad Rank, is determined by other factors. Your Quality Score x Your Max CPC determines your position. (view this post for more details of how ad rank is calculated). Now that we understand Ad Rank Calculation, we can dive into your Actual CPC.
Actual CPC is determined by…
Dividing your Quality Score (QS) by the Ad Rank (AR) of the advertiser below you gives you an idea of your Actual CPC. In the example, Scott can expect to pay 8(alison’s AR) / 10(his QS) = 8/10 or $0.80. Alison= 7/8 or $0.88. Jon pays the minimum to receive a click in this auction.
Remember, this calculations are done EVERY time ads are shown. Don’t over analyze this formula/concept. You wont be able to see these numbers (other then your own Max CPC and QS). Instead, use it as a visual and more indepth expression of the importance of higher Quality Score.
The “Proof is in the Pudding”
We were working with a client a while back and they came to us with an already active AdWords account. We noticed some issues right off that bat that needed to be addressed and we were confident that once they were, costs would come down and ROI would go up.
We spent some time working on the Accounts structure, improving landing page relevance, keyword relevance/ad relevance and more. Our clients average CPC went from $1.00/click to less than $0.70/click. That is a 30% decrease in click costs.
Now, we realize that cost is not the only metric to look at. We look at Click Thru Rate, Conversion Rate, etc and saw improvements in all areas.