How is CPM and CPC CPA calculated

Cost per Click (CPC)

Cost-per-click: brief explanation

 
The term cost per click (also cost per click or CPC for short) describes a method for billing advertising costs in online marketing. The CPC model is used to determine how much an advertiser has to pay if their advertising costs are billed using the Pay per Click (PPC) payment method.

Detailed explanation:

 
There are various payment models for advertisers on the Internet. One of the most popular is the pay per click model. With this model, every click on an advertisement (banner, text advertisement, etc.) incurs costs for the advertiser. How high these costs are can be calculated using the CPC accounting method. The CPC model is one of the most important methods of price regulation in search engine advertising. Cost per click (CPC) and pay per click are often used synonymously.

In the PPC model, advertisers create advertisements on the Internet that are placed specifically on participating websites or in the results of search engines by an intermediary such as Google. As a rule, the ads are displayed for specific target groups. If a user clicks on a banner or a text ad, the advertiser has to pay a predetermined price for it. The resulting costs can be calculated using the cost-per-click method.

With its AdWords and AdSense network, Google is considered to be the largest advertising broker in online marketing. Even if different bidding methods are available here, the cost-per-click model is the most commonly used.

How are the costs calculated in the CPC?

 
The cost-per-click model at Google AdWords is based on a system in which the best advertising space for ads is allocated using a bidding process. In a kind of auction, advertisers offer the maximum amount they are willing to pay for a click on your ad. The higher this amount, the higher the probability of getting a good advertising space.

To determine who actually gets the best advertising space, Google calculates a value that is the product of your own bid with other factors. The chances increase with a higher bid, but the price an advertiser is willing to pay is not the only decisive factor. Its quality score as well as the keyword or the product environment that is being advertised also determine the placement of the advertisements.

According to Google, a click on an ad can never be more expensive than the maximum amount entered by the advertiser. If the closest advertiser offers less, the costs can also be significantly lower. Google describes the price that an advertiser ultimately pays as the actual cost per click.

How high should a bid be in the CPC process?

 
Google makes suggestions to the bidder as to how high the maximum bid should be. At the same time, depending on the type of ad, the AdWords program adds other factors to allocate the advertising space.

At Text ads in search engine results pages (SERPs), Google takes into account:
 

  • the keyword being bid on and the traffic and search queries that keyword is likely to generate
  • the so-called quality score of the advertiser, which includes the quality of the ad as well as the relevance, quality and user experience (with) the landing page

 
Simplified example:

Bidder A has a Quality Score of 5, Bidder B has a Quality Score of 6.

Both bid for the same keyword.

Bidder A bids € 5, bidder B only € 4.

Google then calculates the winner from the quality score and the bid:

A: 5 x 5 = 25, B: 6 x 4 = 24

Bidder A wins the auction.

At Ads on the Google Display Network takes Google into account:
 

  • the advertiser's quality score
  • the quality of the advertisement (banners etc.)
  • the relevance of the advertised product for the website on which the ad is shown

 
How much a website that displays the advertisements earns depends on:
 

  • the quality, relevance (in terms of the advertisement) and reach of the page on which the advertisement is positioned
  • the format and positioning of the advertising on this page

How does bidding work in the CPC process?

 
The bidder can submit bids to Google manually or automatically. With automatic bidding, the AdWords program chooses the bids that best fit the budget. The bidder simply sets a maximum daily budget, and Google then decides how the advertisements generate the most clicks.

With manual bid setting, the bidder plans exactly how much he wants to pay for which keyword or which ad group. As a result, he retains control over his bids, but has to accept increased manual effort.

After the maximum bids have been submitted, Google determines which bidder buys which advertising space. The actual CPC is determined in an auction.

Simplified example:

Bidders A and B received the same quality score from Google.

Bidder A is bidding € 5, but bidder B is bidding only € 3.

Bidder A is awarded the contract. Although € 5 was his maximum bid, he only pays € 3.50 here, as the actual CPC is based on the next lower bid.

Each bidder can observe and analyze his competitors using the AdWords software. For example, Google provides information about who is bidding or how often the ads are seen. However, the software does not show how high the respective CPC bid is or how much a competitor is paying for its advertising space. However, many SEO tools offer this feature.

After the advertising space has been allocated, the advertisements are displayed in the corresponding positions until the advertiser's budget is used up, the campaign is discontinued or a competitor outbids him.

Alternatives to billing according to CPC:

 
In addition to the cost per click model, there are other models for billing advertisements. This includes:
 

  • Cost per Acquisition (CPA): With billing according to the CPA model, advertisers pay for every conversion or acquisition that occurs after a click on the advertisement. What the conversion / acquisition consists of is defined by the advertiser: For example, from registering for a newsletter, opening a user account or making a purchase in an online shop. This includes other billing models, such as billing according to CPL (cost per lead = payment for each contact address generated) or CPO (cost per order = costs for each order placed).
  •  

  • Thousand contact price (CPM) or. Cost per Mille (CPM): The CPM is based on so-called impressions. An impression corresponds to an advertisement that is displayed once visibly on a website. So here the advertiser pays every time Google has shown one of its advertisements a thousand times on one or different websites. It is irrelevant whether a user actually saw the ad or even clicked on it. The TKP / CPM model can only be used in Google AdWords or AdSense for advertisements in Google's display network, i.e. for advertisements on websites.
  •  

  • Cost per View (CPV): Billing according to the CPV model relates to video offers. Advertisers pay for video views or clicks on call-to-action buttons.

 
The CPC model is arguably the most commonly used on Google AdWords. It offers the advantage that an advertisement is only actually calculated if the user has actually noticed it and has thus acknowledged it with one click. So when the user shows interest in the offer. In contrast to CPM billing, where it is never really clear whether a user has actually seen or perceived the ad, the click can be clearly measured here.

However, CPC billing also has disadvantages. Studies repeatedly indicate that users, especially on mobile devices, frequently click on the ads by mistake and thus incur costs. The advertiser can also incur unnecessary costs if an AdWords ad is shown even though the same page appears directly below it in the organic search results. And last but not least, the CPC billing harbors the risk of improper use: users can deliberately click on an ad multiple times, thus driving up the costs for the advertiser. However, Google counteracts this as far as possible and does not charge invalid clicks.

Conclusion:

 
The CPC is a widespread billing model for advertising on the Internet. The costs are billed per click. The CPC model is used in particular in Google's AdWords advertising network. Here, the costs for each click are calculated in a bidding process, in which the bidders are evaluated according to different aspects. Advertisers can bid for advertisements in Google's search results as well as in the Google Display Network.

AdWords is Google's main source of income, which is why the CPC process is used by thousands of Internet platforms to acquire the best advertising space.


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