Cost Per Click (CPC) Definition - Investopedia

What Is Cost Per Click (CPC)?

Cost per click (CPC) is an online advertising revenue model that websites use to bill advertisers based on the number of times visitors click on a display ad attached to their sites.

The primary alternative is the cost per thousand (CPM) model, which charges by the number of ad impressions, or views, of the display ad, regardless of whether or not a viewer clicks on the ad.

The cost-per-click model is also known as pay-per-click (PPC),

Key Takeaways

• Websites bill advertisers based on cost per click (CPC), which is an online advertising revenue model.
• Content publishers often use a third-party company to create matches with advertisers.
• Google's AdSense platform is one of the largest of its kind.

Understanding Cost Per Click (CPC)

Cost per click is commonly used by advertisers who have a set daily budget for a campaign. When the advertiser's budget is reached, the ad is automatically removed from the website's rotation for the remainder of the billing period. For example, a website that has a CPC rate of 10 cents would bill an advertiser $100 for 1,000 click-throughs.

The rate that an advertiser pays per click may be set by a formula. The common formula used is the cost per impression (CPI) divided by the percent click-through ratio (%CTR). Other publishers use a bidding process to set their rates. The CPC is the fee that a website publisher receives when a paid advertisement on the site is clicked.

Most publishers use a third party to match them with advertisers. The largest such entity is Google Ads, which uses a platform called Google AdSense.

Those clicks can add up to real money. Global online advertising was projected to reach $455.30 billion in 2021, according to eMarketer.

How Much Does a Click Cost?

A click costs an average of $2 but there are wide variations among industries. A click from a Google search results page costs an average of $2.32 while a click from a publisher's display page averages about $0.58.

The Google Ads system applies discounts to advertisers with a high Quality Score. This score is determined by the relevance of the ad and the advertiser's content to the search terms used.

Google AdSense

Google AdSense is the largest but by no means the only company with a platform for website publishers looking for advertisers.

Google AdSense serves more than 38 million websites worldwide with its automated ad delivery system. Its easy-to-use ad platform attracts solo bloggers as well as major publishers. Its big clients include the publishers of the BBC, Bloomberg, and Forbes websites.

How It Works

Web site publishers sign up with Google AdSense to get display text and video ads automatically placed on their sites, choosing from various sizes and formats. Google's algorithm determines which advertisers to place on the site, based on the type of content or subject matter, the number of advertisers interested in that material, and the amount of traffic that the site receives.

The publisher's payment is based on the number of times viewers click on the ads it delivers. The amount paid per click is that ad's CPC.

Google reportedly pays its publishers 68% of the revenue their sites earn and keeps 32%.

The Ad Auction

The ad auction on Google AdSense begins with Google selecting the pool of bidders from among all advertisers. The pool consists of the advertisers with the messages that are most appropriate for that website. That is, the ad message and the content it links to are likely to be relevant to the audience that will see it.

The best position on the page goes to the highest bidder if the highest bidder also has a Quality Score that is as good or better than the next highest bidder. An ad with a lower bid but a higher Quality Score can bump the high bidder.

Alternatives Emerge

There are plenty of alternatives to Google AdSense, including Media.net, Infolinks, Amazon Advertising, and Bidvertiser, to name a few.

Some specialize in small or large publishers, and some offer a better deal than Google AdSense to stay competitive.

Amazon Advertising is designed to allow Amazon website affiliates to place ads that reach shoppers on and off the Amazon website when they are searching for specific products.

Meta Ads Manager allows advertisers to run campaigns on Facebook and Instagram.

Enter the Blockchain

Blockchain technology has the potential to create a major change in online advertising technology. Its promise lies in part in its ability to count clicks more accurately or, at least, count human clicks and ignore bot clicks. Advertisers believe that video-viewing metrics, in particular, are being overstated by the sites that host them.

One benefit of using blockchain technology to target advertisements seems to be that advertisers can reach their intended audience directly while cutting out the ad platform intermediary as well as ensuring greater integrity in the numbers of clicks reported.

It should be noted that this concept may have peaked before it came to fruition. Close observers of advertising technology are suggesting that its use as a cure-all for online advertising's quality-control issues has been over-hyped. "The use cases that live up to the hype are going to be more creative and will involve marrying blockchain with cryptography," Christiana Cacciapouti, of MadHive, told AdMonsters.

CPC vs. CPM

In the print world, advertisers choose publications that match their customer profiles and place ads in them. They pay more for bigger ads and more prominent placement, but the effectiveness of those ads can usually only be implied by tracking before-and-after sales numbers. Coupons and contests are among the strategies that help them track their ads' effectiveness better.

In the online world, advertisers know how many people were at least interested enough to click on their ads. That has led to two of the primary ways to reach consumers through web advertising:

• Cost per mille (CPM) or cost per thousand is a pricing model that charges advertisers for the number of times their ads were displayed to a consumer.
• Cost per click charges advertisers only for the number of times that a consumer clicked on their ads to get further information on a product.

Which Is Better?

Cost per mille is good for brand recognition and product awareness, assuming that page visitors at least see the logo and, however unconsciously, absorb the message.

Cost per click is generally considered more effective because it actually drives traffic to the advertiser's site.

In fact, that's the whole point for advertisers of content, who are looking for an audience rather than buyers. Unfortunately, it's also the whole point of click-bait, the cheesy ads that use outrageous headlines to entice users to click.

Most online advertising platforms offer both CPC and CPM models.

Advantages and Disadvantages of CPC Advertising

Cost-per-click advertising is more highly valued and more expensive than CPM advertising because it indicates that an ad has gotten a prospective customer to take the first step towards taking action, whether it is making a purchase or getting more information.

Cost per mille inevitably means paying for some undefined number of page impressions by people who ignored the message.

Cost-per-click pricing varies widely since it is usually a bidding process among advertisers for display on the pages that are called up with the most pertinent search words. A sponsored product ad on Amazon, for instance, costs about 81 cents per click. That may be the advertising gold standard if you're selling frying pans and buying placement on results pages for frying pans.

What Best Describes the Relationship Between Maximum CPC Bids and Ad Rank?

An ad's rank is a constantly moving value. It is the position the ad achieves on any given display page. So the ad's placement on a page changes every time the ad is displayed, depending on its relevance to a particular search entry. Users of Google AdSense set a maximum CPC bid that places a limit on the amount the advertiser is willing to pay for a click from an advertisement. A lower threshold generally means a lower position on the page. However, Google maintains that ads that use keywords that are the best match for the search can result in higher placement than an ad with a higher bid that is not as good a match.

How Does Target Cost-Per-Acquisition (CPA) Bidding Determine the Optimal CPC Bid?

In Google AdSense, Target CPA Bidding aims to help advertisers maximize their budgets by selectively displaying the ads on pages that are most likely to get results, based on the ad's past performance. The system is designed to avoid "unprofitable" clicks that merely eat up the ad budget and favor those that lead to real results like sales, subscription signups, or app downloads.

How Do Cost-Per-Click Ads Compete?

CPC advertising is all about lead generation. Advertisers attempt to select the audience that they believe will be most receptive to the product they are marketing. A wider audience is a waste of money. They write their message to resonate with that audience, whether it consists of young parents, people who fish, or adventure travelers.

The objective is to get the most audience members to click on that ad in order to see a landing page that makes a sale.

The Bottom Line

Demographic targeting of advertising was created offline, primarily by the print magazine industry. It allowed advertisers to choose a specialty magazine that reached the audience that was most likely to be interested in their product.

The cost-per-click advertising model emerged with the web. It added an actionable element in the ability to immediately click on a link in order to get more information, place an order, claim a coupon, or download an app.

The software for creating ads and buying ad space is growing increasingly sophisticated. However, the primary concern of advertisers in using either the cost-per-click or cost-per-impression models is accuracy in the reporting of the actual numbers that the ad reaches.