The cost an Adword’s Advertiser pays may be laid out on the bill as technically paying on a Cost Per Click basis, but in truth Adwords is cleverly setup so advertisers are actually paying on a CPM (Cost Per Thousand) basis. This is important for Advertisers to understand as CPC can seem like a no-lose situation, where you only pay for interested traffic, but in fact you’re paying for all of the other traffic that passes by as well.
The price you pay in Adwords is based on your bid and several additional factors, most notably your click through rate. Google states this is to improve the experience for users and keep searches relevant, allowing good advertisers with small budgets to still compete with their competitors, no matter the size of their competitor’s budgets. So providing you can get a good CTR, you can keep your bid low and still pay a low CPC in a good position.
In the short term it makes no difference to Google which way you go. Whether you get a few clicks and bid high, or get loads of clicks and bid low, because Google is multiplying your bid by your click through rate they’re effectively balancing the costs so you pay the same either way. In which case it makes sense to make sure you get as many clicks as you can – which also means more money for Google.
Google’s only real revenue driving asset is the page views of its search results, and each day they only have about 400million opportunities to make money from them. In an ideal world, every time a search results page is viewed it would end in a user clicking an ad and making them money – but if a user isn’t convinced by one of the ads they’ll either search again, click an organic listing or even worse try one of Google’s competitors. So Google needs a way to push advertisers to make their ads as ‘clickable’ as possible, and offsetting the advertiser’s CPC by their CTR does exactly that.
But it’s not all just a devious plot to attract advertisers with false promises of free advertising if the user doesn’t click. Google genuinely do want to build a reliable service that user’s can trust to quickly find what they’re looking for. Incentivising advertisers to make every impression count cuts out the white noise of spammy advertising and creates a much better user experience (and a bigger, more loyal, cash-generating user base for Google).
So every time one of your ads is viewed by a user who doesn’t click, don’t count it as a free impression. That wasted impression is pushing down your CTR and therefore pushing up your CPC. You really do pay for every impression, so don’t get suckered in to thinking you’re getting something for nothing.