Definition and Function
The term pay-per-click (abbreviated to PPC) and its synonym cost per click (CPC) derive from online marketing. Pay-per-Click is defined as a revenue model in which advertising costs depend on the total number of clicks received.
The most prominent PPC platforms are Google Ads and Facebook Ads, but there are several other platforms like Twitter Ads, Linkedin Ads, Quora Ads, and more.
Other common pricing models in online marketing include cost per impression (CPI), cost per action (CPA), cost per order (CPO) and cost per lead (CPL).
When calculating total costs, the PPC value indicates how much an advertiser has to pay for each click on the corresponding advertisement.
As a formula, this can be represented as follows:
Figure: Formula used to calculate the PPC value, Author: Seobility
Figure: Formula used to calculate total costs depending on the PPC value, Author: Seobility
The number of clicks is tracked by a hyperlink in the advertisement in order to transparently calculate the total costs. If an ad is only displayed on a website (also called ad impression) this does not cause any costs. Contrary to models such as cost per action or cost per order, the user's behavior on the website (e.g. buying a certain product) is not relevant for the total costs of the advertising campaign.
Consequently, this model is chosen by advertisers if they are primarily interested in attracting users to their website. Concrete actions, such as purchase transactions, are not the main goal.
In practice, PPC is mainly used in search engine advertising (SEA) and affiliate marketing.
Pay-per-click in search engine advertising (SEA)
Companies can place ads in Google’s search results for certain keywords. Pay-per-Click is a frequently used payment model in systems such as Google Ads.
Advertisers can use Google Ads to search for various keywords that match their website, products, or services. Since ad slots in search results are limited, the prices for different keywords are calculated in a real-time bidding process based on factors such as search volume and popularity among other bidders. The Google Ads keyword planner can be used to determine advertising costs as it shows estimated PPC values. However, you should note that Google Ads now also uses other payment models, such as cost per view (CPV) for the display of videos, and is therefore not limited to PPC.
Pay-per-click in affiliate marketing
In affiliate marketing, the pay-per-click model works similarly. Publishers (also called affiliates) have advertising space on their websites or blogs, which they offer to advertisers and merchants for their marketing. The advertising company’s aim is to increase traffic to its website by placing ads on target group-specific websites and thus creating increased interest in the company.
Compared to search engine advertising, affiliate marketing offers merchants significantly more options for designing their ads, for example through text links, advertising banners, etc. Publishers are usually paid a fixed price and not a percentage amount, i.e. they receive a fixed fee per visitor. These click prices are usually very low.
Advantages and disadvantages
The most obvious advantage of pay-per-click is that costs only incur for actual clicks on the advertisement. Advertisers can usually influence and negotiate click prizes, so they can adjust the advertising costs to their own budget. This allows them to maintain full cost control.
In addition, this payment model offers the advantage that scattering loss can be reduced. For example, advertisers can select keywords for Google Ads campaigns that are relevant to their target group with the help of the keyword planner or similar systems. In affiliate marketing, advertisers can also reduce scattering loss by selecting affiliate websites that are related to their own products and are therefore visited by many potential buyers.
However, this model also has disadvantages. For example, there is a high potential for fraud, as clicks can be generated quickly and easily by the affiliate himself, resulting in high costs for the advertising company although their website has not been visited by potential customers.