Goods and services cost money. In a strict sense, that’s not how the world has to be, but it’s a fact that this is how the world we live in works. And it’s not a completely arbitrary system, either. Almost always, the cost of goods or services is highly correlated to the value that good or service provides. This is just as true for AdWords PPC advertising as it is for the rest of the world, but in the world of PPC, we have a few other factors to consider when we wish to understand how costs are determined. In this post, I’m going to look at the main factors that cause PPC ads to cost advertisers so much money. We’ll discuss Quality Score, ad position, bid requirements, and competition and industry factors, plus few other weird things that all work together to determine how much you’ll pay for advertising.
A longtime favorite topic of all PPC managers, Quality Score is Google’s assessment of how high (or low) in quality your ad actually is. Because Google depends on its results to bring users back (so that they can click more ads!), Google is actually just as concerned with the quality of the ads it shows visitors as it is with their organic search results. Perhaps because Google makes most of its revenue through PPC ads, they use CTR as the main indicator of quality. The more clicks your ad gets, the higher its quality will typically be deemed. Now, it’s important to note this shouldn’t be viewed as a simple cash grab. People selecting an ad from the results acts as social proof – visitors are voting with their clicks on which ads best satisfy their needs. It’s not necessarily in an advertiser’s best interest to have a high CTR. If you want to qualify the visits to your site to make sure the visit is likely to convert, this may actually work to drop your CTR and your Quality Score. Advertisers have to work through what is most important to them and their end goals when working through their strategy. You can see a more through discussion about the ins and outs of Quality Score here.
Your ad position is determined by an equation that looks at both your Quality Score and your bid. A high Quality Score will only get you some of the way. The rest of the equation is determined by an advertiser’s bid. Even if you get a bargain on your CPC though achieving a 10 Quality Score, a position 1 ad will still cost you more than having your ad in position 2, and so on. So, the higher your ad is found in the search results, the more money you’ll pay. But also your ad attracts many more clicks when it is found higher up in the search results. So, if you’re paying more to be up top, and you’re getting more clicks by being there, it’s easy to see how your costs can grow exponentially with a high enough position. As with all things digital marketing, you should measure your advertising results and consider your results in terms of your ad position. It may not always be profitable to be the first ad result on the page.
While there is no ceiling to how much an ad could potentially cost (though you yourself control it through your maximum CPC bid), there is often a floor. First, it’s important to mention that this warning that pops up in your keyword status column is just an estimate. This is an automated message based on your keyword’s Quality Score. You may notice that your average position for these keywords is actually much better than these warnings would lead you to believe. Before upping your bid, investigate your performance, and see if raising your bid is the right thing to do. If you’ve viewed AdWord’s automated Opportunities, then you’ll know that automated warnings don’t necessarily take all the factors of your account into consideration. On the other hand, since your first page minimum bid is based on your Quality Score, you can also look into optimizing your campaigns, ad groups and ads to be more relevant and position your account to have a better CTR.
Competition and Industry Factors
In some markets, competition serves to drive prices down for the consumer, but AdWords works as an auction and more competition only drives prices higher and higher. With how ad cost is calculated, you will pay $.01 more than it would take for the next highest competitor to keep their position, so in this way, your competition in part will always determine the actual PPC you end up paying. Furthermore, in some industries the return on a potential click is so high that competition works in an additional way by driving up the actual bid each advertiser is willing to place. From an advertiser’s perspective, the most important thing to consider is the returns being seen from the ad spend. If a $100 bid turns into $5,000 worth of business, it might be well worth it. Even if it takes 10 $100 clicks – spending $1,000 on a single conversion – it may very well make good sense with a 5:1 ROI. But then, the same click on the same keywords will then be worth $120 for competitor X, and maybe $140 for competitor Y. Certain industries have such big margins available, and so few meaningful clicks out there (think certain law cases, cord blood services, corporate SaaS, even certain degree types), that each advertiser is willing to pay more and more per click. Furthermore, there are many industries where doing this still yields a handsome return.
Other Weird Factors
AdWords can be a strange, almost mystical platform where we don’t always absolutely know why some things happen. Typical answers involve some spinoff of “quality,” which leaves things murky at best. That said, you may find yourself in an industry that Google just determines is of low quality. In these cases, you’ll usually see generally poor quality scores, no matter what you do, and thus higher ad costs. We’ve seen these most frequently with industries that might seem a little “spammy.” Other industries are prone to use keywords which may have more than one meaning, or keywords that would fall into two or more camps different. Think about someone bidding on the keyword “asset management degree.” There are not too many people actively bidding on this keyword, but there are plenty of advertisers bidding on “asset management” or “management degree.” If these other advertisers aren’t using exact match or some specific negative keywords, then you’ll often see a mixed SERP of ads catering to many different intentions. When you find yourself competing against many advertisers in different industries, this will still drive up your actual CPCs, even if these other advertisers are not your real-life competition.
Ads cost money because there is high demand, and thus competition, on high value keywords and placements. Asking why AdWords ads are expensive is kind of like asking why Super Bowl ads are so expensive. It’s because it works, and because it’s what the market will bear. But unlike Super Bowl advertising, in the case of PPC ads, you actually have more flexibility on the fly and a lot more time to get it right!