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What is Cost Per Click (CPC)?

Cost per click (CPC) is the amount that an advertiser pays when their search advertisement is clicked.

What Is Cost Per Click and How Does a CPC Strategy Work?

Companies may choose to purchase a digital advertisement on a website, or a link at the top of the search engine results page (SERP) to gain visibility, traffic, and conversions (transitioning a view/click into a desired action/purchase). The pay-per-click (PPC) strategy is just one part of an overarching search engine marketing (SEM) campaign, where the cost-per-click (CPC) is the amount paid by a company for each click on an advertisement or purchased link placement.

Marketing strategies change as technology evolves and continues integrating into facets of everyday life. Digital advertising surpassed other forms of media in 2018, and is expected to gain the lion’s share of advertising spending in the next few years. This trajectory makes understanding the complexity of search engine marketing —  to build or to buy — more important now, than ever.

Pay Per Click (PPC) and Cost Per Click

The term “cost-per-click” is often confused with “pay-per-click”, but they are not the same. CPC refers to the amount paid per click to the host of the advertisement, or the search engine ranking the link, by the company that is sponsoring the ad or link. PPC is the method of marketing used to elevate the link or advertisement into a highly searched or visible place on the SERP or on a website. The PPC advertisement placed on a host website uses the host’s traffic to gain impressions or clicks. A business may also purchase a higher placement on the search engine results page, striving for the potential click of a user. The CPC will be determined by that placement and paid each time the ad is clicked. 

Pay-per-click advertises through a third party, such as Google, Bing, or Yahoo, who then post ads on high-traffic and/or relevant websites to promote visibility and garner interaction from likely audiences. Clicks on these ads divert traffic to the advertiser’s site. If the PPC strategy is operating correctly, the CPC should be relatively insignificant compared to the value gained by visibility and consumer conversion, though it does not lend itself to attracting organic traffic the way linkable, keyword-focused content does. 

Impression Marketing and Cost Per Thousand (CPM)

The cost-per-thousand, or cost-per-mille (CPM) is a measurement of impressions. Impressions, views, or ad views, are terms that define the number of times an ad is loaded and displayed on a web page.  

While PPC marketing deals in clicks sold (measured by CPC) to drive conversions and build sales of products or services, impression marketing (measured by CPM) deals in visibility and is typically used to build brand awareness or views for a media website that makes money from the number of views their content receives. Impressions are usually purchased in groups of 1000, thus the name mille (thousand).

Calculating CPC: How Much is a Click Worth? 

There is no universal cost-amount when it comes to CPC, the cost-amount of the CPC is determined by the value of keywords used and the competition in a niche. The CPC transaction occurs when the advertisement is clicked, not when a conversion is made, but the value of the conversion determines the cost of a click. 

For example, a PPC campaign for a lawyer may have a higher CPC than a PPC campaign for a dog walking service. The conversion for a lawyer is worth more than a conversion for a dog walker, so the CPC for law-related keywords is going to be much higher than the CPC for dog walking service keywords.

CPC Formula for Google Ads and Google AdSense 

Google Ads provides advertisement space that will appear on the top of a relevant Google search results page. Google AdSense posts ads on behalf of the advertiser to an individual and relevant website, collects the pay-per-click fee and then pays the publisher for the ad displayed on their site based on clicks and impressions. 

The cost-per-click is calculated through an auction and bidding process. A term is selected by an advertiser and Google calculates the value of the keyword, based on how competitive it is, and how many other advertisers are bidding on this word. A maximum bid is set — the highest amount an advertiser is willing to pay per click. The ad rank is determined for the advertiser (by CTR, keyword relevance, landing page experience) by the formula:

 Maximum CPC Bid x Quality Score = Ad Rank 

The actual cost per click is determined by evaluating the Ad Rank of the advertisement in comparison to the Ad Rank of the following advertisement, directly below it, using the formula:

The Ad Rank of the Advertiser Below /  Quality Score of Ad + $0.01 = CPC

CPC for Facebook Ads

According to Statista, Facebook is the most popular social network in the world. The vast number of active users makes Facebook’s digital advertising highly sought after, and it also works on a bidding system. Facebook analyzes the advertiser’s bid amount, it’s relevance and quality (determined by how much interest Facebook users will have in viewing the ad), and the action rates (how likely Facebook considers that users will take the action being optimized for) to determine the value of the ad. The higher the bid amount, the more likely the ad will win auctions, but the higher the cost-per-click. The lower the bid amount, the less likely the ad will win auctions, but the ad will have a lower cost-per-click. 

Other Advertising Campaigns

Companies may also purchase a flat rate PPC campaign for an advertisement from a specific publisher in which the rate either reflects the competition for the advertisement placement or is agreed upon by a publisher of a website and the advertiser. These may include niche ads on niche websites.

Assessing the Value of a CPC Campaign

When determining an appropriate cost-per-click for an advertisement, a few key factors are considered: 

  • How much visibility and interaction the advertiser is attempting to achieve.
  • How much traffic currently flows through the host website or advertising space.
  • The click-through rate. 
  • The budget the advertiser is willing to spend. 

These factors determine the amount to be charged per click. The cost of a click is calculated through this formula:  

Cost-per-impression (CPI) ÷ percent click-through rate (%CTR) = CPC

The formula provides a cost value that integrates the visibility of the link (impressions), and the link’s click-through rate (performance).

To calculate the average cost per click of a targeted marketing campaign, the total cost may be divided by the total clicks.

CPC =  total cost ÷ total clicks

The value of a cost-per-click campaign can be determined by the return on investment of the campaign.

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What Does CPC Mean for a Search Engine Marketing Strategy?

A search engine marketing campaign strives to create visibility for companies and products. This increase in visibility offers a greater chance of conversion: harvesting traffic and clicks, which may lead to purchases or desired actions on a website. 

In many instances, links are bid on by a number of advertisers competing for the market value of the link space, or the potential for all of that click-through traffic to yield clicks. The cost-per-click will be determined by the bid, and the bid is determined by the market value of the Ad Rank,  link space, or post space, and the Quality or Relevance Score (the click-through rate and relevance of each keyword to its ad group) of the advertiser.

SEO vs SEM: When To Earn or Buy Traffic

PPC campaigns offer targeted results, and offer useful strategies while building a brand name, or creating visibility around launching a new site or product. However, CPC is not a scalable long-term strategy. PPC search engine marketing does not seek to improve organic or evergreen traffic to a company’s site like a search engine optimization (SEO) campaign is designed to do. Instead, it is a strategy used to pull traffic through purchased and placed advertisements that often appear at the top of the SERPs.

While SEO is bundled up under the umbrella of SEM, SEO differs in strategy from other SEM methods. SEM may use the purchasing power of links or advertisements to gain visibility or brand awareness with a strategic plan for conversion, while SEO seeks to build and garner authority by positioning a brand as a resource, resulting in organic, evergreen rankings and traffic. A strong SEO strategy will: 

  • Audit existing content and suggest technical optimization; 
  • Asses linkability and identify opportunities to reach and serve more audiences; 
  • Analyze the competition to identify new and important keywords for targeting; 
  • And produce a holistic roadmap for elevating a website’s authority and search visibility. 

This authority can also replace or supplement reliance on PPC campaigns to draw in traffic by earning visitors organically. While PPC is great for purchasing traffic, SEO is used to build acquisition channels that will garner traffic naturally. Once your PPC campaign is over, the flow of traffic via your PPC acquisition channels will disappear. Good SEO, on the other hand, ensures that potential customers with relevant queries will always be able to find you.

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