If you know all about Pay-Per-Click advertising (PPC) you might want to sit this post out (or better, please read and comment; this is Web 2.0 after all.)

Today’s big news in the world of tech/digital marketing is the Microsoft-Yahoo search deal, which sees Microsoft become Yahoo’s search provider while Yahoo’s sales team will sell advertising on behalf of both companies. This will, subject to regulatory approval, create a serious rival to Google in the world of search and specifically in the world of PPC.

A random sample of advertised jobs from this week’s UK (digital) marketing press (online and offline) includes the following:

Head of Search Marketing – Top 5 Media Agency
This is a senior management role for a talented SEM professional. It’s one at a top 5 media agency, and is responsible for one of the biggest spending Search accounts in the UK. With a focus on PPC, you will also be able to devise strategy across all SEM activity and provide continuity and integration. For this a deep knowledge of Search media will be required, along with vast experience (7 years plus), preferably agency side.

PPC Account Manager – Top Digital Agency
A rare opportunity to join what is widely regarded as the best digital media agency in the UK has arisen – and as such we require a skilled search expert (PPC) to work in an AM role with financial & automotive clients. You will need to have at least 2 years working in a search-focussed role, preferably within a media or search agency working on big budget clients, managing their PPC campaigns on a daily basis.

PPC Manager – Integrated Agency
You will manage all elements of Paid Search, with an objective of enhancing our current client’s marketing campaigns to encourage more PPC spend and gain new business for the agency. Responsibilities: Taking campaign briefings from clients Producing paid-search strategy and integrating it with other media activity. Preparation of copy strategy Building of PPC campaigns in Excel. Management of the trafficing process. Ongoing analysis of campaign performance.

(btw if you successfully apply for any of these jobs, you owe me a drink at the next Digital Lounge event in London. Cheers.)

None of these jobs existed ten years ago. It is estimated that PPC now accounts for 60% of total online spend (Revolution, July 2009).

So where did this PPC business spring from? I thought it might be interesting and useful to define exactly what were talking about, to summarize how we got where we are today and then speculate as to what might happen next.

What is PPC?

To clarify: we are not talking about natural (organic) search (=Search Engine Optimization=SEO) i.e. making our website easy to find by Google/ Yahoo/ Bing. We are talking about paying for a ‘sponsored link’ i.e. a short (normally) text ad looking like a traditional classified ad in a newspaper except it can be clicked on. On the Google results page, it appears either above the search results or down the right hand side, in the section marked ‘sponsored links’. When it is clicked on, you (the advertiser) pay Google for each clickthrough to your site.

Google AdWords offers pay-per-click (PPC) advertising for both text and banner ads. (with local, national, and international distribution). Google’s text advertisements are short, consisting of one title line plus two content text lines. Image ads can be in one of several different Interactive Advertising Bureau (IAB) defined standard sizes.

So: you’re effectively buying space, but in a different way from the old offline newspaper/ magazine model. For each keyword you select (which you judge to be relevant to your website), exactly where your ad appears depends on the result of an auction, in which all qualifying ads compete for the best places on the Google results page/s. (The amount that you have ‘bid’ is the maximum you are prepared to pay, per click, to get your ad displayed in the best possible position). And you pay £cost per click x number of clicks i.e. you literally PAY PER CLICK. (you can set a maximum total payment after which your ad will not be displayed – or if it is, you won’t pay).

How exactly does it work?

Google wants:

(a) The user to have the best possible experience. If the user searches for a given keyword (a single word or phrase) they expect to see a series of results, the natural listings and the sponsored links (= paid-for ads), each of which indicates exactly what they will get when they click on it. Followed, after a click, by a website delivering EXACTLY what they are looking for. In this scenario, the user is happy and Google remains their automatic choice for future searches. So Google is happy.

(b) To make money. Google has created this amazingly complex and successful search engine which currently dominates the web and has become synonymous with search, which is itself growing as more and more users spend more and more time online, searching for more and more information, products and services. As a commercial company, Google expects a reward; it has done extremely well out of selling PPC advertising and intends to continue to do so. Indeed Google makes c.95% of its revenues from Search. (i.e. selling ad space on its results pages, and also on Blogs and Google mail/ Gmail). This helps to fund its various other ventures (eg.Google Wave, Maps, Street View, Latitude, YouTube, Android, Chrome, +++) some of which are currently net costs to the organisation i.e. ‘awaiting monetization’…

Google is adamant that (b) doesn’t get in the way of (a).

“We have a fundamental philosophy with which we push these projects-we really want to improve life for people.”

Sergey Brin, co-founder, Google.

But exactly what factors influence where AdWords places your ad?. Where your ad appears and how much you end up paying depends on the result of what has been called a “Generalized second-price auction”. Let’s have a look at the AdWords auction in detail.
Every time a user does a search, the auction is conducted and competing ads allocated to appropriate spots, all before the user sees the results pages. (Yeah. Amazing, I know.)

Your ad will be at the top or down the right-hand-side of the search results.
Google is trying to deliver the best experience for users so they want your site to be relevant to users who are attracted by your ad; they will tend to promote you in position (i.e. higher up) if they believe this is the case.

Crudely: Position = winning bid amount* x quality score#

*How much you bid per click. (the more you are prepared to pay, the higher position your ad will be shown in, starting with the top of results and working down the right hand side from page 1 and then onto the subsequent pages of results.)

#QUALITY SCORE: How relevant/ useful Google perceives your ad/ your site to be.

Note Google doesn’t fully reveal how QS is calculated; expert commentators believe QS consists of:
• Historical click-through rate of this ad (and your others, if any!)
• Ad Copy Relevance (to the keyword i.e. how well the ad matches the user’s query)
• Landing Page Quality (loading time, relevant and original content and ease of the navigation of your site).
Note you can specify that you only want traffic from particular countries (e.g. those visiting the .fr or .co.uk or .de site/s) and/ or day/ time of day.

So working on improving your ‘Google quality score’ means you will pay less per click for better positions (getting you cheaper clickthroughs, from people who are specifically looking for your product/ service, which must be good business). Effectively Google is rewarding you for being a good advertiser, which some might find patronising. But hey, remember these guys have 65%+ of all search traffic(!) which some might also say explains a certain bullishness, sometimes bordering on arrogance…

Owing to the complexity of AdWords and other PPC products and the amount of money at stake, some advertisers hire a consultant or specialist agency to manage their PPC campaigns. (see job ads above). Indeed a whole industry has sprung up based on offering PPC expert advice. There are also various proprietary software products assisting with PPC Campaign Management, Bid Optimizing, Reporting and Analytics.

History of PPC

In February 1998 Jeffrey Brewer of Goto.com, a 25-employee startup company (later Overture, now part of Yahoo!), presented a PPC search engine concept to the TED conference in California. Credit for the concept is generally given to the Idealab and Goto.com founder, Bill Gross (who allegedly ‘borrowed’ it from Yellow Pages).
Google started search engine advertising in December 1999. In October 2000 the AdWords system was introduced, allowing advertisers to create text ads for placement on the Google search engine. However, AdWords only introduced PPC in 2002; until then, ads were charged at ‘cost-per-thousand impressions’. Yahoo advertisements have been PPC-based since their introduction in 1998. So PPC is still a young industry.

What’s going to happen?

Historically, Google hasn’t always got everything right. In November 2006, Google bought privately held YouTube for $1.65 billion in stock and still shows few signs of monetizing it. Remember Google Click-to-Call? It was a service provided by Google which allowed users to call advertisers from Google search results pages. Users entered their phone number, Google called them back and connected them to the advertiser, with call charges paid by Google. It was discontinued in 2007. There are ongoing challenges to Google in the areas of privacy/ consumer data retention. Street View has attracted significant opposition in this regard.

Google has, however carved out a massively powerful position in the world of search. Google can’t afford to lose this dominance; its business model is currently largely dependent on it. Indeed AdWords is Google’s flagship advertising product and main source of revenue (estimated at $21 billion in 2008). We may be assured that Messrs Schmidt, Page and Brin (the triumvirate running the company) are very interested in how well AdWords is doing.

Equally Microsoft will not accept its current small share of the lucrative search market. Its new search engine, Bing, and the much vaunted deal with Yahoo! (acquisition of the Yahoo! Search business would give Microsoft almost 30% of the US Search market) are evidence that Microsoft is going to take the fight to Google. Of course search advertising revenues depend primarily on where the users are searching and here Google currently has a position of massive strength. Even if Bing is a superior product (i.e. a true ‘discovery engine’) Google has strong user loyalty and inertia; suggesting that Bing needs to deliver a SIGNIFICANTLY better user experience to gain trial and change searchers’ habits.

Meanwhile Google is, understandably, not sitting idly by while Bing attacks its market share (after all “disloyalty is only one click away” as Google CEO Eric Schmidt is fond of saying). Google Squared is a response to the launch of Bing; Wolfram Alpha is positioning itself as ‘a computational knowledge engine that draws on multiple sources to answer user queries directly’ and Ask.com has rebranded itself (again). People are suggesting that Twitter’s increasing use for ‘real time search’ is a threat to the search engines. Then there’s mobile search with its unique requirements and (currently) restrictions. Much is at stake here. Exciting times.

As with most things in digital marketing, we can measure what’s giving us best results and work to improve our overall ROI. You (or your PPC agency) should be asking: how much are we paying per click against which keyword and what do those clickers then go on to do i.e. how much is the click actually worth to us, the advertiser? Certain keywords will be very popular, (e.g. ‘lowest cost mobile phones’) so that bids required to get your ads shown in high ranking positions will need to be high. Maybe you can do better by bidding on niche keywords? What about your ad copy? Is it persuasive, descriptive and relevant to your site? And what happens after they click through? Test various landing pages, tracking the results. Measure and optimise your PPC ads. Continuous evaluation and improvement should be the strategy. TEST, TEST and TEST!

So if your boss asks you “how much do we pay per click?” the answer should probably be something like: “much less than we would be spending if we weren’t watching the metrics so closely and optimising every aspect of our campaigns so carefully, but still more than I would like.”

PPC will keep evolving. Specifically everyone involved with PPC should be watching Bing and the new Microsoft search partnership with Yahoo. Although the market shares of the various competing search engines are certain to change, the discipline of Pay per Click Advertising looks set to grow in importance within the world of digital marketing.

And oh yes; remember to work on that Quality Score…