CPC (cost-per-click) is simply the amount advertisers have to pay every time one of their ads is clicked. Ideally, this click would result in a conversion but that is not always the case. Therefore, advertisers must be strategic in what they are willing to pay for every click.
That being said, advertisers set a max CPC for their keywords. A max CPC is the maximum amount an advertiser is willing to pay for a single click. An advertiser will never have to pay over the max CPC they set and the majority of the time they will pay less based on what their competitors are paying. The final amount that an advertiser will actually pay is called the actual CPC.
How Actual Cost-Per-Click is Determined
It’s all about bidding. The most you will ever have to pay is $0.01 higher than what your competitors are paying, until you’ve reached your max CPC. Actual CPC is determined using the following two components:
- Max CPC
- Quality Score
Your max CPC is multiplied with your quality score to determine your ad rank. Then, based on your ad rank and your competitor’s ad rank directly below you, your actual CPC is determined. Let’s look at the example below:
When you multiply Jane’s max CPC by her quality score her ad rank is 10. Then to determine her actual CPC you take the ad rank of the advertiser directly below her, Bill, divided by her CPC and then you add $.01 to ensure that her position is held.
In PPC advertising some potential problems could arise, like click fraud, which may affect your cost-per-click. Click fraud is when an automated program or script imitates a user and clicks on an ad for the purpose of malicious intent. Basically it’s a way to raise an advertisers cost.
In order to avoid this scenario an advertiser should look at IP addresses to see if an extensive amount of traffic is coming from anyone IP address. It’s all about monitoring your account and checking for any activity that is unusual and not resulting in conversions.