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Cost-per-click Keyword Advertising
Cost-per-click (CPC) keyword advertising involves paying ad networks to deliver your all-text ad—comprised of a title and brief description—when specific keyword phrases are searched by users on partner sites that offer search functions. Depending on the ad network, these ads may be delivered on the top of regular search results, or in the case of Google, to the side of search results.
Unlike ad programs where you pay for impressions on a cost-per-thousand basis (CPM), with CPC programs you pay only when a user clicks through to your site.
CPC programs involve bidding on keyword phrases to attain high positions. For example, on the
Overture network it’s desirable to be one of the top listings, because only the top are guaranteed to be shown on the first page of search results on all Overture's partner sites, which include Yahoo! (which owns Overture), MSN, Lycos, InfoSpace and others. Depending on the partner site, users may have the option to click on a link to see more sponsor listings, but the number of users who will do so will be a very small percent. Here's an example from Yahoo! for a search for "car insurance":
These Sponsor Listings are placed above the real search results, the difference between advertising and editorial. Here are the actual bids for the ads (at the time of the screen capture):
In Overture's system (at this writing), advertisers set maximum bids but are charged the minimum clickthrough rate needed to keep them in their positions. For example, the advertiser in the number two position has specified a maximum bid of $9.42 for the term "car insurance," but is actually paying $9.01 per clickthrough because the advertiser in the third position has placed a maximum bid of $9.00.
The other major CPC ad network is
Google's AdWords Select program pioneered placing text-box ads on the side of search results on its site. (Yahoo! is now doing this as well.)
The blue boxes to the right of this text are an example of how keyword ads look on Google's site. You can see that Google provides more real estate for advertisers, allowing for up to eight ads per page of search listings.
Google also has a program called AdSense whereby just about any small publisher can run Google adwords and share in the clickthrough profits, just as we're doing on these pages.
Similar to Overture, you provide a maximum CPC bid on the keywords you want and Google automatically adjusts your cost to one cent higher than your next competitor. However, having the highest bid does not guarantee top position. Position is assigned according to a formula: maximum cost per click times clickthrough rate (the percentage of times an ad is clicked on versus the number of times it is delivered as an impression). Or, CPC($) X CR(%) = Rank. So if your maximum CPC is $.75 and your CR is 3 percent, your rank is 2.25. Competitors who are paying less per clickthrough than you can thereby get superior position. In this situation, if you want superior position, you have to increase your maximum CPC and pay more than one cent more than your next competitor. This is discussed further in the Issues and Challenges section below.
Overture and Google are the top CPC keyword advertising programs because they control the lion's share of Internet search, due to partnership agreements with most of the major search engines and other high-traffic sites. Overture claims to reach 80 percent of all Internet users and Google claims more than 150 million searches a day. Overture is the well established pioneer in this business, delivering (it claims) more than a billion clickthroughs a year to its more than 67,000 advertisers. However, early in 2002 Google launched its own CPC program (previously its keyword advertising was on a CPM basis), and in May contracted with AOL to deliver its AdWord Select sponsored listings on AOL Search, taking AOL away from Overture.
Guidelines and Measurement
We believe in the value of CPC keyword advertising and nearly always recommend a program on some level for our clients, because we find that, if approached correctly, worthwhile results can usually be had with even small budgets. In addition, CPC keyword advertising is a great tool when speed of results is important, because you can be driving traffic to your Web page within three days (the maximum period it takes to get listings approved by the ad networks). So it's effective for testing keywords and Web copy. Or when you need to raise awareness for an imminent event of limited duration, be it a promotion, festival, concert, or some other engagement.
That said, CPC keyword advertising is becoming increasingly difficult due to competition driving up CPC rates, as well as other factors as described in the Issues and Challenges section below.
How we approach a CPC program for clients depends on a combination of factors, including the following:
- Client goals
- Client budget
- Type of product or service offered and its pricing
- Analysis of the number and popularity of keyword phrases available that are relevant to a site and its products
- The competition and CPC cost for those keyword phrases
- Geographic factors; i.e., are services limited to a city or region?
- How well positioned they are in the directories
- How well we can position them in specific search engines through SEO
We mention client goals because you don't have to sell product on your Web site to derive value from CPC keyword advertising. Any goal that could be advanced by bringing new, targeted eyeballs to a Web site can benefit, such as brand building or a public affairs/issues management program.
Budget is an obvious factor, bearing in mind that return on investment considerations govern keyword advertising as they do any other marketing program. If a demonstrably good return on investment can be achieved, a budget can be expanded.
Fortunately, CPC advertising is highly measurable. You pay for a clickthrough—that is, a highly targeted sales lead comes to your Web page—and that is what you get. And we can verify this through log file analysis. Log file analysis reveals, among other things, referrer data such as how many people came to your site from a specific search engine by searching on a specific search term. When we run keyword advertising. we create a different file name for each ad and each program, such as Overture, so that we can identify which clickthroughs came from the Overture network and from what specific keyword phrase and ad.
You can also track conversions with your keyword advertising, either through a third-party tool or through the conversion tracking programs that the keyword ad networks provide for free. In other words, you can see which specific keywords are producing which sales and look at conversion rates and for your different keywords and understand which are being most productive.
This is especially helpful if you sell product directly on your site, because now you have a clear idea of your ROI because you can correlate a relationship between number of visits and sales.
Even if sales are made through other channels, such as the phone, you may be able to set up systems to track which leads come from the Web site (e.g., you ask people where they sourced you) and then have these orders entered into the shopping cart on the website.
The pricing and margin of a product or service you're selling will have a lot to do with how much a given clickthrough is worth to you. If the cost of your product is $14, for example, you probably don't want to pay $2 per sales lead (a clickthrough)—unless perhaps you know there's a worthwhile lifetime value in attaining such a customer.
Even if we find that some of your most obvious and desirable keyword phrases seem too pricey on Overture and Google, there may be plenty of other relevant keyword phrases that can be had at low cost. Hence the importance of a thorough
keyword analysis. Oftentimes we're able to find, through research and databases, some very specific, very relevant keyword phrases that can be had in the vicinity of the minimum CPC of $0.05 on Overture and Google.
One strategy is to use Overture and Google for only those keyword phrases that are inexpensive and deliver good value. And for the pricier keywords phrases, to use some of the smaller players in CPC keyword advertising, such as
FindWhat and Sprinks.
These programs get nowhere near the volume enjoyed by Overture or Google. For the most part, they partner with sites with relatively minimal traffic, such as ISPs. Some programs offer any Web site the ability to become an affiliate by placing the ad network's search capability on its site.
While these smaller ad networks do not deliver much volume, their CPC rates are nearly always much lower than those of the major networks. For example, for one client a keyword phrase that costs more than $7.00 on Overture costs a penny on FindWhat. The smaller CPC networks are excellent if you want to employ a maximum ROI strategy at the expense of volume. The smaller networks are also a lot more flexible than the big players.
For example, we find they're a lot more flexible when your business is confined to a specific geographic region. If you can only offer a service in California, for example, Overture demands that "California" be in the keyword phrase. This is highly limiting but understandable from Overture's point of view because they want maximum clickthroughs for their inventory.
An important guideline in any CPC program concerns the creative—that is, the words in the title and description of the listing. The listing should be both as enticing and specific as possible. Enticing, because you want people to click on it. Specific, because you want only qualified sales leads to click on it to minimize your costs. Given how few characters of text are allowed, as seen in the above examples, this is a challenge.
Issues and Challenges
You should know that the CPC ad networks, especially Overture and Google, set many and varying limitations or rules for use of their networks. Some are understandable, while others we regard as dubious.
A fundamental rule is that an ad listing must be relevant to the Web site or page it's pointing to. For this reason Overture's human editors must first approve a listing before it goes live on the network. Google will let you go live immediately but then will reign you in if they think there's a problem. Further, these ad networks will reject keyword phrases that do not get searched enough to justify the network's resources. This is less an issue with the smaller networks.
Now for the challenges, which are so numerous and complex that we will mention only a few. These stem, in our opinion, from the fact that only two ad networks currently control virtually all of Internet search, despite the popularity of CPC keyword advertising. Imagine if there were only two channels available for reaching consumers through the medium of broadcast television.
Not surprisingly, when you have a seller's market, the sellers get hard nosed and less concerned about customer service and customer needs.
For example, prior to Google launching its CPC program, Overture provided its advertisers (and still offers the option) with a fixed bid system, which creates an inefficient market because it leads to gaps (and sometimes large ones) between bids in a real-time, 24/7 online bidding system. Thus, an advertiser might bid $3.00 to get the third position ahead of a $2.99 bid, then a few days later find that the $2.99 bidder had dropped out of the program and the fourth bidder is now paying only $.99, meaning the $3.00 bidder has been paying $2.00 more per clickthrough than was necessary. Very good for Overture, of course. Only after Google launched its system that automatically adjusts bids to one cent more than the next highest position did Overture introduce its Max Bid/Auto Bid program. And pretty quickly, too.
And yet even this new system creates an inefficient market to Overture's advantage. The reason is that, unlike most other online auction systems, Overture publishes your maximum bid for your competitors to see, per the examples above. In a nutshell, this negates the benefit of the automated-maximum-bid system, because it demands you pay just as close scrutiny to your bid environment as under the old system. Otherwise, a savvy competitor can bleed your budget.
Imagine the maximum bids of a given keyword phrase lining up as follows: 1) $6.00, 2) $1.01 3) $1.00, 4) $0.99. This represents an efficient auction, as the first bidder, while willing to pay up to $6.00 if the market dictates, is currently only paying $1.02 per clickthrough, or one cent more than the number two bidder. But now suppose on Friday night, after the first bidder has gone home for the weekend, the second bidder changes his/her maximum bid to $5.99 cents. He/she will continue to pay $1.01 for every clickthrough, but now the number one bidder will be paying $6.00 for each clickthrough. The number two bidder benefits by bleeding the number one bidder. Overture benefits by getting $4.98 more per clickthrough than it otherwise would. The only way to protect yourself is to either constantly monitor your program or pay for a third-party automated bid-checking service, just like before, to disguise your maximum bid.
As you can see, Overture is proactive in applying technology to ensure no pennies are left on the table. They have every right to do so, but their communications are disingenuous, in our opinion. Here's an email we received from Overture threatening to remove a couple of ads (which they eventually did) because they were under performing.
As you know, Overture is committed to delivering relevant results to search users. This commitment increases our ability to renew partner agreements and helps provide better conversions for our advertisers.
To further this commitment, Overture has begun using Click Index(tm). Click Index works by evaluating a listing's performance using historical click-through rate data for that specific term, as well as the listing's click-through rate relative to its position within its Overture keyword marketplace. Listings that significantly underperform are taken offline, but may be allowed back online if changes are made to improve click-through performance.
So Overture says the issue is a concern for delivering relevant results to users, and that's why the Click Index technology has been introduced. Nonsense. The reason that the ads in question may have been getting fewer clickthroughs than Overture's historical data (and they were getting clickthroughs, even in the fourth and fifth positions) is not because they lacked relevance, but because they were highly relevant. The title of these ads included the minimum price for the service being offered. So it's profits, not relevancy, that most concerns Overture. It is in their financial interest to have ads as vague as possible if this would generate more clickthroughs for them at the expense of lower conversion rates for their advertisers.
Another example is Overture's introduction of Match Driver which, incidentally, is not optional. Thanks to Match Driver, your ad is delivered to searches that are related to the keyword you contracted for, not exact matches. Overture spins this as a service to its advertisers. Well it can be. If your keyword is red widgets and the searcher misspells widgets then you're happy that Overture presented your ad. However, our overall experience (and you can only evaluate this through log file analysis) is that we get far more clickthroughs that we don't want than we do want. For example, we get free red widgets. Our clients generally don't pay for advertising to offer free products.
Google's AdWords Select program elicits similar challenges.
Earlier we mentioned how Google assigns ad positions according to a formula that combines CPC and clickthrough rate. Similar to the Overture example above, Google's rationale for this policy is its undying commitment to delivering relevant results. Firstly, we're talking about advertising here, not results as in search results as in the independent editorial provided by search engines. Is this an advertising program or isn't it?
Secondly, as you can see from our client's example cited above, there comes a point where greater relevance yields a lower clickthrough rate. Think of it as a bell curve. Thus Google's system discourages greater relevancy after a certain point (i.e., after the top of the bell curve). What it really does is promote higher bidding through an inefficient, unfair auction system—in our opinion.
Worse still, Google sets different minimum prices on each of its keywords, even when there's no competition. This is akin to a reserve price auction. We've had many examples where we've submitted a keyword to Google, for which we're paying the minimum $0.05 cents on Overture, and for which there is no competition on Google, yet Google will accept nothing less than a $1.00 bid. Google says that it establishes these minimums based on years of data from its previous CPM-based AdWords Select program.
This leads us to conclude that Google, and Overture as well, do not really want to be in the CPC business. The cost-per-click model, the idea of it, is an attractive lure for advertisers. But it's really smoke and mirrors after all these rules and technologies are employed to squeeze advertisers for more than they'd have to pay in a fair auction.
We may some day come to miss the good old days of paying for impressions.
Barbarians at the Gate
For years
LookSmart was one of the top directories, feeding its results to MSN and other search sites. In April 2002 it suddenly announced it was moving its Small Business Listings program to a cost-per-click model.
The poor way this new program was communicated and rolled out caused an uproar in the industry. Previously, LookSmart was charging commercial sites $299 a year to be listed in its directory, similar to the Yahoo! model. When it moved to the CPC model, it offered existing customers a $300 credit for clickthroughs, but spread this out at only $15 a month for 20 months. So when you reached the $15 credit ceiling before the end of the month, LookSmart sent an email asking you to pony up more money or be de-listed until the next month's credit kicked in.
LookSmart charges a flat rate of $0.15 per clickthrough, which may seem expensive if you're paying only $0.05 CPC for that same keyword on Overture or Google. However, given the escalating cost of keywords on these networks, less than $0.15 a clickthrough is becoming a rarity. LookSmart has also softened its approach since the program's launch. A $49 set up fee is required for new customers, as well as an initial $45 account deposit, but the account deposit is now refundable. Overall, from an economic perspective, LookSmart's CPC program seems quite reasonable to us.
It may well be worthwhile, too, because LookSmart feeds results to MSN Search, one of the top-drawing search portals, To be effective with this program, it's important to achieve the best possible directory listing—rich in the right keywords—per our discussion on
Search Engines vs. Directories in our About Search Engines essay. One unique wrinkle to a LookSmart listing versus other directories is that you can submit up to 10 keyword phrases that will influence where your listing shows up.
What disturbs us a great deal about the LookSmart program is that LookSmart partners do not identify the LookSmart listings they use as advertisements. They share in the CPC profits with LookSmart, and justify this audacious breach in the separation of editorial and advertising on the grounds that the listings were reviewed by human editors or that the same ranking algorithms were applied to them as to other search results.
MSN just throws them in with its other results under Web Directory Sites. Its explanation:
Within the Web Directory Sites and Web Pages sections, there may also be links where the Web site owners have paid for either expedited review of their site or paid for clicks to their site. These sites are ranked using the normal algorithm applied to all links within each section, with no change in rank due to payment.
LookSmart partner CNN calls the LookSmart search results Reviewed Web Sites. Its explanation, provided by LookSmart, is the following:
Reviewed Web Sites are listings that have been evaluated by LookSmart editors. The Reviewed Web Sites section of search results includes Web sites selected by our professional editorial team, editorially-reviewed paid listings from our advertising partners, and noncommercial sites contributed by Zeal community members. All listings are held to the same quality standards, whether they are commercial or noncommercial.
Listings appear and are ranked in this section based solely on their relevance to a user's search as determined by LookSmart's proprietary search algorithm. Payment does not influence the appearance or rank of the listings in the Reviewed Web Sites section.
It is insisted that payment has no influence over ranking, that ranking is determined by an algorithm. But nowhere is it stated that this algorithm does not favor paid listings. No search engine or directory publishes its algorithm.
We cannot know the truth behind any of these assertions. But we can ask, when has money accepted not had any influence....over anything? And is it not the rule that a perception of potential conflict of interest is worse than the conflict itself? When you see how Google and Overture employ every technology possible to squeeze every penny from their advertisers, the financially troubled LookSmart is surely then a saintly business, having the capability and the clandestine cover to maximize profits, yet refusing to do so to maintain editorial integrity.
LookSmart and its partners are not the only ones unconcerned with clear separation of advertising and editorial, only the worse. For example, several Overture partners deliver Overture ads, yet identify them merely as being provided by Overture, and not as advertising. Yet why would anyone other than a marketer make it his/her business to know that provided by Overture means paid listings?
As a marketer, you might be thinking, isn't all this good for me? Well, in the long term, it will not benefit you for the search engines accepting your CPC advertising to be discredited and abandoned by consumers in favor, perhaps, of new search engines that do not accept CPC advertising. Even short term, we think it benefits you to have your ads clearly identified as ads because it further qualifies the people who click through to your site: they know you're advertising because you have something to sell versus something to give away for free. And getting as highly targeted clickthroughs as possible is what CPC advertising is all about. Or isn't it?
We're not the only ones to be troubled by this conflict of interest between editorial and advertising in search engines. In July 2002 the Federal Trade Commission (FTC) sent a letter to the search engines strongly urging that, among other things, paid-for search results be identified as such, distinguishable from non-paid results.
As of this writing, the search engines don't appear to be taking the FTC very seriously.
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