Cost Per Click Definition

Cite this article as:"Cost Per Click Definition," in The Business Professor, updated March 13, 2019, last accessed December 4, 2020, https://thebusinessprofessor.com/lesson/cost-per-click-definition/.

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Cost Per Click (CPC) Definition

Cost per click (CPC) refers to a system that is used to make online advertisement through internet sites. It works in such a way that the advertiser pays for advertisement clicks that are charged through CPC. It the most currently used mode of website advertisement.

A Little More on What is Cost Per Click or CPC

Usually, the clicks are made on online advertainment websites directly to the portal of the company making the advertisement.  Averagely, the CPC tends to be higher compared to the impression they create to the company. This is because the clicks require the viewer to click the add question in order to reflect in the portal. It is also hard for the portal where the format is developed.  This difficulty in the clicks is attributed to the format that makes it necessary to find ways to increase the clicks in the portal. Besides, it is also costly to develop and implement the CTR strategy that has more benefits to the advertising.

Currently, the advertisers use the portal to increase the marketing awareness that aims at reaching many customers as well as acquiring a new customer.

The objective of the cost per click or CPC

The main objective of cost per click is to provides more options to the advertiser to establish rates for placements when they want to make advertisement in different online portals.  The CPC also has a higher return due to an increased number of visits to the online platform connected to the advertisement format and controlled by the system of payment.

This model helps in increasing sales by increasing the customer awareness and eventually customer base. Besides, it also supports the formats of advertisement that increases the visibility and eventually sales.

For example, ABC agency would like to make an online advertisement campaign. This would begin by establishing the best price rate controlled by the CPC with formats linking the advertisement blog.  This is followed by choosing the promotion banner that fits the desired online marketing. Therefore, the agency would pay based on the number of users that views and click the ad.

References for Cost Per Click

Academic Research for Cost Per Click

  • Sponsored search: A brief history, Fain, D. C., & Pedersen, J. O. (2006). Bulletin of the american Society for Information Science and technology, 32(2), 12-13. This article explores and presents an overview of the cost per click model. ┬áThe author presents that, following the introduction of the internet, most of the company resort to the online advertisement as a way of creating marketing awareness. ┬áClick per cost is the most currently used model by the advertising websites to make their advertisement online.
  • Predicting clicks: estimating the click-through rate for new ads, Richardson, M., Dominowska, E., & Ragno, R. (2007, May). In Proceedings of the 16th international conference on World Wide Web (pp. 521-530). ACM. Following the introduction of the internet, the search engine has gained considerable priority in web browsing. This paper examines the estimation models that are used to determine the probability of making clicks. ┬áThe paper presents that selecting the right ad and how they are displayed on the website determines the likelihood that they will be viewed by the user and make a click on each ad. This also has the impacts on the income of a search engine from each ad. The author also states that displaying appropriate ad that is appealing to the users improves their satisfaction.
  • Dynamic costper-action mechanisms and applications to online advertising, Nazerzadeh, H., Saberi, A., & Vohra, R. V. (2007). (No. 1450). Discussion paper//Center for Mathematical Studies in Economics and Management Science. ┬áThis paper examines the challenges associated with the allocation of resources recurrently over time among the particular agents. ┬áThe author presents that benefits that the agents derive from consuming a particular item are information that is kept privately by that agent and previous consumption may not be available to that agent. Therefore, the challenge occurred and steered by auctioning of the keyword in which the resource to be allocated depends on the space on the search engine.
  • Optimal control of selling channels for an online retailer with costÔÇÉperÔÇÉclick payments and seasonal products, Chen, F. Y., Chen, J., & Xiao, Y. (2007). Production and Operations Management, 16(3), 292-305. This paper examines the challenge of pre-digestion of the decision that faces online retailers that make their advertisement on comparison-shopping or publisher websites. ┬áThe authors present that a retailer may sell their products on various platforms such as yahoo.com and they are not compelled to use only online and bricks-and-mortar stores. However, this is based on payment of a certain amount through schemes such as cost per click. ┬áThe further paper state that the payment of clicks is based on some clicks which make it convenient for the retailer to make equate the cost and benefits they receive from the website.
  • Incentive problems in performance-based online advertising pricing: cost per click vs. cost per action, Hu, Y., Shin, J., & Tang, Z. (2015). Management Science, 62(7), 2022-2038. This article examines how price models can result in risk sharing between the advertiser and the publisher and focus on the mechanisms to improve the viability of the online ad. ┬áThe study revealed that the Cost Per Action (CPA) model incentivize to improve the ads better than the CPC model. However, the CPA model is likely to create the problem of adverse selection compared to CPC. It was also discovered that the leading advertiser tends to have a lower profit margin under the CPA model compared to the CPC model.
  • Costperclick pricing for display advertising, Najafi-Asadolahi, S., & Fridgeirsdottir, K. (2014). Manufacturing & Service Operations Management, 16(4), 482-497. Online display advertising is a multi-billion business that has promising growth in the revenue in the future. This paper examines the online display marketing communication set up whereby the web publisher posts the ads on their website and make charges on the advertiser based on the number of clicks on the add. ┬áThe author presents that the publisher is faced with the problem uncertainty in demand for the advertising spaces and uncertain traffics on the websites.
  • An empirical analysis of search engine advertising: Sponsored search in electronic markets, Ghose, A., & Yang, S. (2009). Management science, 55(10), 1605-1622. This paper conducts an empirical analysis of search engine advertising. ┬áThe study is based on constructing a general equilibrium model for home and foreign country`s Schumpeterian growth that has no sales growth. The scale effect is replaced by bringing two different specifications to the production function. ┬áThese specifications include a permanent effect on growth PEG and temporary impact on growth TEG.
  • Pricing of online advertising: costperclick-through vs. costper-action, Hu, Y., Shin, J., & Tang, Z. (2010, January). In System Sciences (HICSS), 2010 43rd Hawaii International Conference on (pp. 1-9). IEEE. This paper explores and makes a comparison between two models of pricing online advertising. The study focuses on Cost Per Click model and Cost Per Action model. This study is based on the application of incentive theory of economics to examine the pricing models. ┬áIt further gives an in-depth explanation of how the Cost Per Click model and Cost Per Action model should be used on the pricing of online advertising.
  • Single-period balancing of pay-perclick and pay-per-view online display advertisements, Kwon, C. (2011). Journal of Revenue and Pricing Management, 10(3), 261-270. This paper investigates the balancing problem faced by the web publishers when using Cost Per Click and Cost Per Action model for online advertising. The paper refined the prior research recommendations that focused on optimal advertising strategies. The study also investigated how contracts and pricing affect the optimal display mechanism numerically and analytically.
  • Performance-based pricing models in online advertising: Cost per click versus cost per action, Hu, Y., Shin, J., & Tang, Z. (2012). Atlanta: Georgia Institute. This paper studies and compare the two models of pricing online advertising. The study focuses on Cost Per Click model and Cost Per Action model. This study applies the incentive theory of economics to examine the pricing models. ┬áIt further gives an in-depth discussion of how the Cost Per Click model and Cost Per Action model should be applied by the web publisher and the advertiser regarding the pricing of online advertising.
  • Location, location, location: An analysis of profitability of position in online advertising markets, Agarwal, A., Hosanagar, K., & Smith, M. D. (2011). Journal of marketing research, 48(6), 1057-1073. This paper examines the impact of ad placement on profitability and revenues generated search engine using data from the ad campaign. The study revealed that as the rate of clicks decreases with position, it follows the increase in the conversion rate.

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