You can’t talk about pay-per-click (PPC) advertising without discussing cost-per-click (CPC). Whether it’s Google Ads, Facebook Ads, Twitter Ads or any other online advertising platform, cost-per-click is at the heart of PPC advertising.
But what is CPC, really? And how big of a role should it play in your marketing decisions?
Those are great questions. While cost-per-click is certainly an important part of PPC advertising, it’s really only useful if you understand how it fits into your overall marketing strategy.
So, with that in mind, let’s take a hard look at what this metric is, what it measures and how to use it to make smart marketing decisions.
What is Cost-Per-Click?
In it’s truest form, the term “cost-per-click” is what it sounds like: a description of how much an advertiser paid for a click.
However, since the term is so closely tied to the idea of pay-per-click advertising, many people use PPC and CPC interchangeably, even referring to pay-per-click advertising as “cost-per-click advertising.” It’s not a very common term amongst marketers, but you do hear it floating around from time-to-time.
The History of Cost-Per-Click
The term “cost-per-click” probably originated sometime in the mid-nineties, when businesses like Planet Oasis and GoTo.com first developed the PPC advertising model. Back then, an expensive click cost as much as twenty-five cents.
But, until Google entered the paid search market in 2002, the term CPC really wasn’t all that well-known. As with many other aspects of the internet, Google changed all of that almost overnight.
After Google introduced PPC to their AdWords platform, online advertising soon became a much more viable marketing channel. The rest was history. PPC and CPC became concepts that every marketer (and most business owners) would need to master if they hoped to run a profitable online business.
Why Cost-Per-Click is Significant
Many business owners tend to think about cost-per-click in fairly absolute terms: cost-per-click is the price of advertising online. But while that’s an accurate description, CPC is actually much more complicated than that.
You see, CPC is the solution to a business conundrum: How do you make money off of an online user base?
Up until Google’s breakthrough success with their CPC model, companies like Yahoo! were building a user base, but they didn’t really know how to monetize those users. Everyone knew there was a lot of value in having a big audience, but no one had cracked the code on how to turn that audience into cash.
With the CPC model, Google proved that you could make money off of an online audience using a very simple formula:
- Create an online platform that solves an unmet need in the marketplace.
- Build a large userbase of people who implicitly trust the platform.
- Charge businesses to advertise to that userbase in a seamless fashion—without violating users trust.
That model has been used by a variety of businesses ever since. Take Facebook, for example. Facebook started in 2004 as a place for people to connect and stay in communication with friends, family and colleagues.
Whether Zuckerberg realized it or not, he had just solved a need in the marketplace. Facebook wasn’t the first one to address this problem—just like Google wasn’t the first business to offer online search results—Facebook just met that need in a more effective way.
With the News Feed and other features, people could easily communicate with people they cared about and on a platform that they trusted. As a result, Facebook took off.
Once it had a huge userbase, Facebook was then able to monetize its platform by giving advertisers the ability to add their own content to users’ feeds—for a price.
You see the same pattern repeated over and over. Twitter, LinkedIn, Instagram, Pinterest, Reddit—wherever a business could find an opportunity to build a decent-sized user base, they could make money with the CPC model.
CPC and You
So what does all of this have to do with you and your business? Well, it’s very simple: Cost-per-click isn’t about you. It’s designed to help advertising platforms capitalize on their userbase.
Unfortunately, the moment a platform like Google or Facebook starts monetizing their users, they run the risk of losing their userbase. If people lose faith in the platform, they’ll leave.
To mitigate this, these platforms want to incentivize advertisers to play nice with their users.
Low-quality, uninteresting or irrelevant advertising is upsetting and distracting. It makes people angry and upset. So, to encourage advertisers to create high-quality, interesting and relevant content, advertising platforms charge businesses less if their ads perform well…and more if they don’t.
As a result, CPC isn’t a static metric. In fact, while most platforms will display a predicted cost-per-click for a given target keyword or audience, the actual CPC that you pay will vary depending on the quality of your advertising.
Unfortunately, most advertisers don’t take any of this into account when they think about cost-per-click. Instead, they focus on how much PPC advertising will cost them.
If a keyword costs too much, they won’t bid on it. If clicks from a particular audience are too pricey, they’ll shut off their campaign. If the CPC for an ad set jumps up, they freak out and immediately assume that something is wrong.
And they do all of this without actually checking to see if they’re making a good return-on-ad-spend (ROAS).
The problem with this sort of mindset is that it misses the whole point of PPC advertising. For both platforms like Google and advertisers like you and me, CPC is just a middle-man metric. It’s the interface between advertiser and advertising platform.
Google wants to make money, so they charge you a certain amount for clicks that makes sense for their business. Your business needs to make money, so you need to pay an amount for clicks that makes sense for your business.
Does it really matter how much you’re paying? Not if you’re making a good return-on-investment. Sure, it can be scary to bid on a high CPC or watch your CPC go up, but if you’re making money…does it matter?
Breaking Things Down
If you aren’t careful about how you use it, focusing on cost-per-click can actually cause a lot of problems in your marketing.
For example, let’s say you are running ads for a SaaS company. On average, a new customer has a lifetime value of $3,500 at a 50% profit margin.
Here’s what your CPC looks like for your top 5 campaigns:
Given these results, many advertisers would be quick to shut off Campaign 4. I mean, seriously, a $19 cost-per-click? That sort of CPC will chew through your budget in no time, right?
But Campaign 3? That’s a campaign worth investing in. Thanks to its low cost-per-click, it drives the most clicks of any of your campaigns at your second-lowest total cost.
But here’s the thing, you don’t make money off of clicks. Quite the opposite, in fact. So, let’s take a look at your cost-per-lead (CPL) and see if it sheds any additional light on the situation:
Here, Campaign 3 seems to be our overall winner once again. The clicks don’t seem to convert very well compared to your other campaigns, but they’re so cheap and there are so many of them that Campaign 3 still has the lowest cost-per-lead.
And, once again, Campaign 4 is in last place with the highest cost-per-lead. Highest cost-per-click plus low conversion rate? Sounds like a pretty poor campaign to me.
But, while leads are more meaningful than clicks, you still don’t make money off of leads, so let’s take a look at your actual cost-per-sale (CPS) and ROAS data:
Campaign 4 has your lowest CPS and highest ROAS? How is that possible?
Well, take a closer look at the data. Campaign 4 may not produce a ton of clicks or leads, but when people do respond Campaign 4, they respond in a big way. Campaign 4’s leads are a lot more likely to actually sign up for your software and each sale is worth more, so they’re signing up for more valuable packages.
So, should you be turning Campaign 4 off? If anything, you should be turning it up. Campaign 4 is your real money maker—even if it does have the highest cost-per-click.
Does Cost-Per-Click Matter?
When you get right down to it, cost-per-click is just the interface between you and your advertising platform. Both of you want to get as much out of the exchange as possible, but the success or failure of your campaigns can’t really be measured by the price of a click.
While it’s always a good idea to keep an eye on the cost-per-click of your campaigns, your CPCs will ultimately be more of a reflection of how much the platform likes your ads and what sort of your competition you’re facing than a true measure of advertising success.
At this point, you hopefully have a good feel for what cost-per-click is, where it comes from and what it means to your business. Honestly, though CPC will always be an important part of PPC advertising, it certainly isn’t the be-all and end-all of online marketing.
If anything, it’s more of a distraction than anything else. If you’re selling a service $100.00 and trying to decide whether it’s worth it to bid on a keyword with a $50.00 CPC, then sure, CPC should be a big factor in your decision-making process. But for most campaigns, your actual acquisition cost and return-on-ad-spend are going to be much more important metrics to consider.
By the way, if you’d like help keeping your cost-per-click down and your ROAS up, let us know here or in the comments. We’d love to help!
How do you use cost-per-click in your campaigns? Do you agree with this analysis? Have something to add? Leave your thoughts in the comments.
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