How PPC Works

This is a prelude to another post on how to maximize your profit when using PPC and CPM platforms. However, before diving into the more advanced techniques, I wanted to make sure everyone is educated on how these platforms work so that my post will make sense to everyone. So, enjoy

There are two different types of bidding platforms that are the standard for most self serving platforms today. One bidding type is pay per click, where you obviously pay for each click that you receive on your ad no matter how many times it is shown. The other option is cpm, or cost per thousand impressions advertising. Each has their own benefits and disadvantages of course, but first, here is how each system works.

The PPC system is the most widely used system on any platform, from Google to Facebook to LinkedIn. In short, you login to your account, set your budget, targeting/keywords and max bid and you are good to go. Of course, it is not that easy on the backend, which is what I am going to explain in depth here.

With PPC and CPM platforms, the person who bids the most for that click or the impressions gets the higher ranking or preferred placement. Basically, you tell a platform how much you are willing to pay for a click to your site. If your bid is the highest, then you will get the highest spot. If not, you will get a lower placement. To really get it, let us look at an example on Google.

I typed in the search term “golf clubs” into Google and this is what I got: http://www.google.com/search?hl=en&source=hp&biw=1760&bih=756&q=golf+clubs&aq=f&aqi=g10&aql=&oq=&gs_rfai=C2wsaU8_FTNf1HJSEygTy85DyDAAAAKoEBU_Qflgn

Now, take the sponsored results on the right side. Those are all part of the ppc system that Google uses. Each advertiser is in a bidding war with each other as to the placement of their ad. The higher up you want to be, the more it will cost you. Also, being on the first page is crucial, as that gives you the maximum exposure, even if you are number 8 on the page.

So, how does the bidding exactly work?

Position Bid Budget
1 $3.50 $100
2 $3.00 $200
3 $2.95 $300
4 $2.50 $75
5 $2.00 $100
6 $1.80 $250
7 $1.75 $250
8 $1.50 $200
9 $1.00 $100
10 $.50 $150

Ok, I put together this little table together quickly to show you how 10 advertisers are approaching this one single keyword. So, #1 will be at the top of the pyramid and they will pay probably $3.05 or something like that since no one bids higher then $3.00. If #2 would move their bid to say $3.25, then #1 would be spending around $3.30 a click. You never pay your max bid unless you have competition. If you have someone who is bidding the same or a penny below you, then yes, you will have to pay your highest bid. But if not, then you just pay the minimum amount above your competitors highest bid, usually in 5 cent increments.

While the bidding system is quite easy, you have to remember that each advertiser has a different budget.  Say #1 gets all the clicks from the traffic to start off the day. Since their budget is $100, they would receive 28 clicks at $3.50 or 32 clicks at $3.05. Either way, once they burn through their budget, they are done for the day, whether it is in 8am or 11pm. When their budget runs out, they are eliminated from the system, meaning that everyone now moves up one spot and the clicks become cheaper. This continues all day as long as traffic allows for it.

CPM works the same way in the bidding respect. Once the highest bidder is done their budget, another ad will show. Or, some companies have a formula where you the highest bid gets shown 5 times, the next bid gets shown 4 times, and so on, meaning that the top 5 bidders get their ads shown, but the premium placement is shown more.

Where CPM really differs is where it is shown and what rate is charged for those placements. If your ad is above the fold compared to below the fold (meaning the part of the screen that you see without scrolling), then those ads tend to cost more. If you are paying on a bidding system, the market determines that cost. With most sites that charge a flat rate for that, premium placements and size obviously are much more expensive.

So, in general, the highest bidder gets the best position. When that person who is paying the most runs out of money, the next person with the highest bid moves into the best spot. It is an endless cycle, depending solely on budgets and traffic.

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