How cost per click is calculated and how to lower it
We will walk you through exactly how your cost per click is being calculated through a real-time auction and the secrets to lowering your cost per click whilst maintaining good results. We will also show how cost per click has changed over time and which platforms are more expensive to advertise in and why.
“So how is your cost per click calculated?”
The amount you spend for a digital click is broadly determined by the four factors below:
- Competition – more advertisers mean you are directly competing with more bidders in the auction (explained below)
- Quality Score – taking into account the quality of your ad, how relevant your ad message and landing page is to the search query and expected click through rates based on historic campaigns with similar keywords if Paid Search and engagement (likes, comments and shares) for social media.
- Bidding strategy – your maximum bid you are willing to spend per click or impression
- Seasonality – the timing of when you advertise also has an impact on your cost per click, for example if Black Friday is a popular time for competitors bidding, this will mean you are competing with more advertisers in the auction
Taking AdWords as an example, you specify your maximum bid for keywords or phrases, Google then evaluates your ad to determine the quality score and the product of your maximum bid and quality score is your Ad Rank. Google will compare you to other advertisers using this Ad rank. This is important because it means that the ad shown in the top position of a search result for ‘hand sanitiser’ isn’t a company selling something else who was just willing to bid the most, only relevant and good quality ads should be shown at the top which is in the best interest of the searcher and advertiser since they will only get impressions for people who are more interested in what they have to offer.
Google then works backwords and answers the question: “what is the bid the advertiser with the highest Ad Rank needs to just win the auction?” which is where the formula comes from. The highest you will ever pay is your maximum bid and funnily enough, in the example above, the advertiser with the lowest maximum bid won the auction due to high relevance.
“How has cost per click changed over the years?”
“Cost Inflation” is a term often sprouted by digital marketers as they worry about the increasing costs of running paid advertisements across platforms such as Google and Facebook. Whether that be pay-per-click search campaigns, image-based shopping ads or display campaigns on social media and popular blog sites, we are seeing a very similar trend. It is becoming more expensive to advertise.
And they would right to be concerned, a study by Hochman Consultants looks at the average cost per clicks across 50 advertisers on the Google AdWords Network from 2005 to 2019, where the advertisers came from a range of industries. We can see that cost per click has been growing steadily over-time and in 14 years, the average cost per click is almost triple that of 2005. This study was conducted in the US but we are seeing a similar trend across advertisers in the UK.
“Why is cost per click rising?” I hear you ask. Like any competitive market, pricing is determined by supply and demand. Taking Google Search as an example, when AdWords first began in 2000, there were 18 million searches per day worldwide, in 2019 there are around 5.6 billion searches a day worldwide, that’s the equivalent to 63,000 searches every second. Not only is that x300 the search volume of when AdWords first began, but with growing capabilities of targeting, you are really able to whittle down more than ever, which search queries you want to bid for based on location and for which demographic you want your ad to shown to. Also, the number of advertisers in digital marketing platforms are increasing, spend for UK Paid Search media surpassed that of TV in 2015 becoming the most spent channel.
“How does cost per click differ across social media channels?”
Facebook and Twitter are the cheapest to advertise in, with Instagram being double the cost, this is mainly due to a different ad format mix, where Instagram ads are more likely to be videos. LinkedIn is by far the most expensive to advertise in, they offer a very niche audience of professionals, with filtering options to target job title, years of experience and company name for example.
“So how can I lower my cost per click?”
As we mentioned earlier, cost per click factors into account the quality of your ad in the ‘Quality Score’ metric. In the example above, the advertiser willing to spend the least actually won the auction due to having a high-quality score. So how can you improve your quality score and therefore lower your cost per click?
- For AdWords, ensure your ad is relevant to the keyword you are bidding for. If you are bidding for ‘hand sanitiser’ but you really sell washing powder, you may need to rethink your keyword strategy
- Make sure that your landing page is relevant for the ad, for example, a landing page with 100 different items to shop from including hand sanitiser wouldn’t work as well as a landing page that is only about hand sanitiser because Google will deem it more relevant
- Optimise for click-through-rate, this is often the case with social media advertisement as well as AdWords. Having a clear call-to-action and a good creative will help
The final note I want to leave with you today is that historic performance of your account is taken into consideration when calculating cost per clicks, so take the time to make sure all ads are optimised as much as possible.
The Brightblue team have decades of experience helping clients understand media efficiency by truly digging into the drivers of sales and revenue. We have experience across automotive, retail, travel, entertainment, telecoms, FMCG, white goods, financial services, health and many other sectors. Our unique way of modelling the entire client journey truly helps marketeers understand what they can do to shine in their organisation by driving business and making a real difference to their bottom line. Get in touch if you have any questions on this article or any of the ways Brightblue can help.