Advertisers select the words that should trigger their ads and the maximum amount they will pay per click. When a user searches on Google, ads for relevant words are shown as "sponsored links" on the right side of the screen, and sometimes above the main search results. Click-through rates (CTR) for the ads are about 8% for the first ad, 5% for the second one, and 2.5% for the third one. Search results can return from 0 to 12 ads.
The ordering of the paid-for listings depends on other advertisers' bids (PPC) and the "quality score" of all ads shown for a given search. The quality score is calculated by historical click-through rates, relevance of an advertiser's ad text and keywords, an advertiser's account history, and other relevance factors as determined by Google.
The quality score is also used by Google to set the minimum bids for an advertiser's keywords. The minimum bid takes into consideration the quality of the landing page as well, which includes the relevancy and originality of content, navigability, and transparency into the nature of the business. Though Google has released a list of full guidelines for sites, the precise formula and meaning of relevance and its definition is in part secret to Google and the parameters used can change dynamically.
The auction mechanism that determines the order of the ads is a generalized second-price auction. This is claimed to have the property that the participants do not necessarily fare best when they truthfully reveal any private information asked for by the auction mechanism (in this case, the value of the keyword to them, in the form of a "truthful" bid).
Pay per click (PPC) is an Internet advertising model used to direct traffic to websites, where advertisers pay the hosting service when the ad is clicked. With search engines, advertisers typically bid on keyword phrases relevant to their target market. Content sites commonly charge a fixed price per click rather than use a bidding system.
Cost per click (CPC) is the sum paid by an advertiser to search engines and other Internet publishers for a single click on their advertisement, which directs one visitor to the advertiser's website.
In contrast to the generalized portal, which seeks to drive a high volume of traffic to one site, Pay per Click implements the so-called affiliate model that provides purchase opportunities wherever people may be surfing. It does this by offering financial incentives (in the form of a percentage of revenue) to affiliated partner sites.
The affiliates provide purchase-point click-through to the merchant. It is a pay-for-performance model: If an affiliate does not generate sales, it represents no cost to the merchant. Variations include banner exchange, Pay per Click, and revenue sharing programs.
Websites that utilize Pay per Click ads will display an advertisement when a keyword query matches an advertiser's keyword list, or when a content site displays relevant content. Such advertisements are called sponsored links or sponsored ads, and appear adjacent to or above organic results on search engine results pages, or anywhere a web developer chooses on a content site.
Among Pay per Click providers, three operate under a bid-based model. Cost per click (CPC) varies depending on the search engine and the level of competition for a particular keyword.
The Pay per Click advertising model is open to abuse through click fraud, although Google and others have implemented automated systems to guard against abusive clicks by competitors or corrupt web developers.
Pay per Click (also known as Pay per Ranking, Pay per Placement, Pay per Position or Cost per Click) enables you to list your site at the top of search engine results by advertising on keywords that best describe your product or service. It's a dynamic marketplace - the higher you bid, the higher your advertisement will be displayed in the list.
You pay only when a searcher clicks on your listing and connects to your site. You don't pay to list; you only pay for clicks or click throughs. This way you only pay for the traffic to your site; there are no other hidden costs.
Pay per Click is not only available on search engines. Publishers can also include Pay per Click advertisements on their sites. For example, we use Google's Pay per Click Adsense product as you can see in the left-hand column.
Flat-rate Pay per Click (PPC):
In the flat-rate Pay per Click model, the advertiser and publisher agree upon a fixed amount that will be paid for each click. In many cases the publisher has a rate card that lists the CPC within different areas of their website or network. These various amounts are often related to the content on pages, with content that generally attracts more valuable visitors having a higher CPC than content that attracts less valuable visitors. However, in many cases advertisers can negotiate lower rates, especially when committing to a long-term or high-value contract.
The flat-rate Pay per Click model is particularly common to comparison shopping engines, which typically publish rate cards. However, these rates are sometimes minimal, and advertisers can pay more for greater visibility. These sites are usually neatly compartmentalized into product or service categories, allowing a high degree of targeting by advertisers. In many cases, the entire core content of these sites is paid ads.
In the bid-based Pay per Click model, the advertiser signs a contract that allows them to compete against other advertisers in a private auction hosted by a publisher or, more commonly, an advertising network. Each advertiser informs the host of the maximum amount that he or she is willing to pay for a given ad spot (often based on a keyword), usually using online tools to do so. The auction plays out in an automated fashion every time a visitor triggers the ad spot.
When the ad spot is part of a search engine results page (SERP), the automated auction takes place whenever a search for the keyword that is being bid upon occurs. All bids for the keyword that target the searcher's geo-location, the day and time of the search, etc. are then compared and the winner determined.
In situations where there are multiple ad spots, a common occurrence on SERPs, there can be multiple winners whose positions on the page are influenced by the amount each has bid. The ad with the highest bid generally shows up first, though additional factors such as ad quality and relevance can sometimes come into play.
In February 1998 Jeffrey Brewer, a 25-employee start-up company, presented a pay per click search engine proof-of-concept to a conference in California. This presentation and the events that followed created the Pay per Click advertising system. Credit for the concept of the Pay per Click model is generally given to Bill Gross.
Google started search engine advertising in December 1999. It was not until October 2000 that the Adwords system was introduced, allowing advertisers to create text ads for placement on the Google search engine. However, Pay per Click was only introduced in 2002; until then, advertisements were charged at cost-per-thousand impressions. Overture has filed a patent infringement lawsuit against Google, saying the rival search service overstepped its bounds with its ad-placement tools.
Although a certain company started Pay per Click in 1998, another certain company did not start syndicating the other certain company’s advertisers until November 2001. Prior to this, a primary source of SERPS advertising included contextual advertising units (mainly 468x60 display ads).