Google Moving to Google AdWords A Hands-On Guide for Premium Advertisers - Manual (Page 16)

5. Determine your spend
You’re accustomed to negotiating a fi xed price, setting an impression goal,
and linking those elements to your budget. Now you’ll achieve the same
objectives in a more precise way: by setting cost-per-click (CPC) and
specifying a daily maximum budget. It’s also important to understand how
click-through rate (CTR) affects your spend. With AdWords, you control all
of these: maximum CPC, ad performance (CTR), and maximum daily budget.
Maximum CPC bids
You establish a maximum cost-per-click (CPC) between 5 cents and $50
that you’re willing to pay for individual keywords or a group of them. You’ll
never pay more than this amount for each click, and will often pay less,
because Google’s automatic discounter ensures you never pay more than
1 cent above what’s needed to maintain your position. To help you, the
Google AdWords system recommends a maximum CPC that we estimate
will result in your ad being shown in the top position 90 percent of the time.
Based on Google’s traffi c history and your max CPC bids, the AdWords Traffi c
Estimator predicts how much you might pay per day. You’ll also see your
ad’s estimated position. If the Traffi c Estimator predicts too many/few
clicks at too high/low a CPC to suit you, just change your maximum CPC.
Ad performance
Achieving a high CTR is important not just because it results in more visits
to your website. It also affects your spending, and a high CTR can save you
money. To see how CTR affects your costs, it’s important to understand how
ad ranking works.
How are ads ranked? Rank (or position) = maximum CPC bid x CTR. The
higher your maximum CPC bid or CTR, the higher your ad’s position.
In the following example, Advertiser A’s max CPC bid is higher than
Advertiser B’s bid. However, B’s ad achieves a higher CTR than A’s (1.8%
versus 1.0%), which helps B achieve a higher rank. B earns the top position
on the page because its rank, at 0.72, is higher than A’s rank, at 0.65.
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