What, Exactly, Determines Your PPC Keyword Price?

It’s a question that’s asked more often then you might think. “What determines my pay-per-click keyword price?” The answer is most certainly not “Google” or another PPC search engine. Truth be told, this question is aptly answered by a quick lesson in PPC fundamentals. Your keyword price, or cost-per-click (CPC), is determined by a combination of your bidding strategy, keyword competition, Quality Score and a handful of other factors.

TIP: PPC terminology 101. While keyword price is a seemingly accurate descriptor, the more appropriate (and widely accepted) term is actually cost-per-click – aka CPC.

• Your Keyword Bids: The most obvious determinant of your keywords’ cost-per-click is in fact your actual bid! Google Ads (formerly known as Google AdWords), Yahoo! Search Marketing and Microsoft adCenter all utilize a maximum CPC bid model for calculating ad position and ultimately your final cost-per-click. If you bid low, your keyword price will be low. If you bid high, your keyword price will potentially increase. Which brings me to…
• Quality Score: What’s a conversation about PPC without mention of the 800 lbs. gorilla in the proverbial paid search room. Quality Score is primarily a factor when advertising in Google Ads, though both YSM and adCenter have their own similar quality initiatives. This post is about keyword price, so I’ll save the nitty gritty on Quality Score for another post. A great Quality Score can allow you to rank your ads higher at lower CPC, and inversely a poor Quality Score will force you to increase bids to achieve higher ad position. Suffice it to say, Quality Score plays a *major* role in determining your keywords’ price by influencing actual CPCs, estimating the first page bid thresholds you see in your Google Ads account and affecting how high your ad will be ranked. (See also my post on the subject at Website Magazine.) Which brings me to…
  • Click-through Rate (CTR): Click-through Rate, and by association the relevance of your ad copy, affects your cost-per-click by directly affecting your Quality Score. Of all the variables that factor into Quality Score, CTR is hands down the strongest influencer. How does this tie back into your keyword price? Follow along with me if you will… Improve CTR and you’ll improve Quality Score which will improve Ad Rank which eventually will lower your actual cost-per-click. Which brings me to…
  • Ad Rank/Ad Position: The core formula for Ad Rank is generally as follows: Quality Score X Maximum CPC Bid = Ad Rank. Ad Rank is technically a raw number that is used to calculate your actual ad position (other factors like Quality Score thresholds, etc., determine actual order). Your ad position will greatly affect your CTR. And as we already determined, CTR plays a big role in determining your actual cost-per-click! Did I mention that fluctuations in competition can affect your ad position? Which brings me to…
• Competition: Competitors are like belly buttons – we’ve all got ’em. Recognize this fact and realize that the ever changing presence of competitors will greatly affect your bidding strategy, ad position, CTR and you guessed it – CPCs. The addition (or better yet, subtraction) of a strong competitor can be attributed to a myriad of variables, but most of us recognize the holiday shopping season as a major instigator of competitive fluctuations in PPC. Which brings me to…
• Other Factors: Seasonality is huge in paid search advertising – and is something I feel doesn’t get as much attention as it should. Regardless, seasonality will greatly affect your keyword price. Whether that be due to a new competitor entering your keyword market for the holiday’s or an old foe increasing their bids for Christmas as expected – these changes will force you to make your own bid and ad changes to remain competitive. All of which circles back to your actual cost-per-click. Akin to seasonality, the general ebb and flow of pay-per-click (yes folks, it’s true PPC traffic changes day to day) will also change your strategies affecting your cost-per-click.

Which brings me to… the conclusion of today’s post! (OK, I promise I won’t use a gimic like that next time I write.) My goal for today’s post is that the next time you hear someone ask, “What determines my pay-per-click keyword price?” you’ll have some informed answers to share. Your keyword bids, Quality Score, click-through rates and even your competitors all play a role in determining your actual CPC – aka your keyword price.

(More: Revisiting the Economics of Quality Score: Why QS Is Up to 200% More Valuable in 2013)

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