Cost Per Click

The term cost per click (also cost-per-click or CPC for short) describes a method of billing advertising costs in online marketing. The CPC model is used to determine how much an advertiser has to pay if his advertising costs are billed according to the pay per click (PPC) payment method.

Various payment models exist for advertisers on the Internet. One of the most widespread is the Pay per Click model. In this model, each click on an ad (banner, text ad, etc.) incurs costs for the advertiser. How high these costs are can be calculated using the CPC billing method. The CPC model is one of the most important methods for regulating prices in search engine advertising. Cost per click (CPC) and pay per click are often used synonymously.

In the PPC model, advertisers create ads on the Internet that are specifically placed by an intermediary such as Google on participating websites or in search engine results. The ads are usually played out to specific target groups. If a user clicks on a banner or text ad, the advertiser must pay a predetermined price for it. The costs incurred can be calculated using the cost-per-click method.

Google, with its AdWords or AdSense network, is considered the largest broker of advertising in online marketing. Although various bidding methods are available here, the cost-per-click model is the most commonly used.

How are the costs calculated in CPC?

The cost-per-click model in Google AdWords is based on a system in which a bidding process is used to allocate the best advertising slots for ads. Advertisers therefore bid in a kind of auction for an amount that they are prepared to pay as a maximum for a click on their ad. The higher this amount, the higher the probability of getting a good ad space.

To determine who actually gets the best advertising space, Google calculates a value based on the product of your own bid with other factors. The chances therefore increase with a higher bid, but the price that an advertiser is willing to pay is not the only decisive factor. Its Quality Score as well as the keyword or product environment being advertised also determine the placement of the ads.

According to Google, a click on an ad can never be more expensive than the maximum amount entered by the advertiser. If the nearest advertiser bids less, the cost can also be significantly less. Google refers to the price an advertiser ultimately pays as the actual cost per click.

How high should a bid be in the CPC process?

Google makes suggestions to the bidder as to how high the maximum bid should be. At the same time, depending on the ad type, the AdWords program adds other factors to allocate advertising space.

For text ads in search engine results pages (SERPs), Google takes into account:

  • the keyword being bid on and the traffic and search queries that this keyword is expected to generate
  • The advertiser’s so-called Quality Score, which takes into account the quality of the ad as well as the relevance, quality and user experience (with) the landing page.

Simplified example:

Bidder A has a Quality Score of 5, Bidder B has a Quality Score of 6.

Both bid for the same keyword.

Bidder A bids 5 €, Bidder B only 4 €.

Google then calculates the winner from the Quality Score and the bid:

A: 5 x 5 = 25, B: 6 x 4 = 24.

Bidder A wins the auction.

For ads in the Google Display Network, Google takes into account:

  • the Quality Score of the advertiser
  • the quality of the ad (banner, etc.)
  • the relevance of the advertised product to the website on which the ad is displayed

How much a website earns that plays out the ads depends on:

  • the quality, relevance (in terms of the advertisement) and reach of the site on which the
  • advertisement is positioned
  • the format and positioning of the advertisement on this page

How does bidding work in the CPC method?

Bids to Google can be submitted manually or automatically by the bidder. In the case of automatic bidding, the AdWords program selects the bids that best fit the budget. The bidder simply sets a maximum daily budget, Google then decides which way the ads will generate the most clicks.

With manual bid setting, the bidder plans exactly how much he wants to pay for which keyword or ad group as a maximum. In this way, he retains control over his bids, but must accept increased manual effort for this.

After the maximum bids have been submitted, Google determines which bidder is bidding for which ad space. The actual CPC is determined in an auction.

Simplified example:

Bidder A and Bidder B have received the same Quality Score from Google.

Bidder A bids €5, but Bidder B bids only €3.

Bidder A wins the auction. Although €5 was his maximum bid, he only pays €3.50 here because the actual CPC is based on the next lowest bid.

Every bidder can observe and analyze his competitors with the help of the AdWords software. Google provides information about who is bidding or how often the ads are seen, for example. However, the software does not show how high the respective CPC bid of the co-bidders is or how much a competitor pays for his advertising space. However, many SEO tools offer this function.

After the advertising spaces have been allocated, the ads are played out at the corresponding positions until the advertiser’s budget is used up, he stops the campaign or a competitor outbids him.

Alternatives to CPC billing:

In addition to the Cost per Click model, other models exist for billing advertisements. These include:

  • Cost per Acquisition (CPA): When billing according to the CPA model, advertisers pay for each conversion or acquisition that occurs after a click on the ad. The advertiser defines what the conversion/acquisition consists of: For example, a registration for a newsletter, the opening of a user account or a completed purchase in an online store. Other billing models can be included here, such as billing according to CPL (cost per lead=payment for each contact address generated) or CPO (cost per order=cost for each order placed).
  • Cost per thousand (CPM): CPM is based on impressions. An impression corresponds to an ad that is displayed once on a website. In this case, the advertiser pays each time Google displays one of his ads a thousand times on one or more websites. It is irrelevant whether a user has actually seen the ad or even clicked on it. The CPM/CPM model can only be used in Google AdWords or AdSense for ads in Google’s display network, i.e. for ads on websites.
  • Cost per view (CPV): Billing according to the CPV model refers to video offers. Advertisers pay here for video views or clicks on call-to-action buttons, for example.

The CPC model is probably the most frequently used in Google AdWords. It offers the advantage that an ad is only actually charged if the user has actually noticed it and thus acknowledged it with a click. That is, when the user shows interest in the offer. Unlike CPM billing, where it is never really clear whether a user has actually seen or perceived the ad, here a clear measurement of the click is possible.

However, CPC billing also has disadvantages. For example, studies repeatedly indicate that users, especially on mobile devices, often click on ads by mistake and thus cause costs. Also, the advertiser may incur unnecessary costs if an AdWords ad is played out even though the same page appears directly below it in the organic search results. And last but not least, CPC billing carries the risk of misuse: users can intentionally click on an ad multiple times and thus drive up costs for the advertiser. However, Google counteracts this as far as possible and does not charge for invalid clicks.

CPC is a widespread billing model for advertising on the Internet. The costs are charged per click. The CPC model is used in particular in Google’s AdWords advertising network. Here, the costs for each click are calculated in a bidding process in which bidders are evaluated according to various aspects. Advertisers can bid here for ads in Google’s search results as well as in the Google Display Network.

AdWords is considered Google’s main source of revenue, so the CPC process is used by thousands of Internet platforms to bid for the optimal advertising spaces.

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