How Does PPC Work? A Guide for the Total Adwords Novice

How Does PPC Work?

This guide is going to explain:

  1. What pay-per-click (PPC) advertisements are
  2. How much PPC costs
  3. What industries/businesses that can benefit from PPC (and how to tell if PPC will not work for you)
  4. A quick guide to setting up PPC ads that are profitable

What are Pay-Per-Click (PPC) Ads?

You’ve seen these ads.  You’ve searched for something and the results looked something like this:

example of ppc ads

PPC ads are paid placement results on Google, Bing, Yahoo, or any search engine.  The advertiser only pays for when someone clicks on the ad, hence the name “pay-per-click.”.  PPC advertising is one of the fastest and most predictable forms of digital marketing available to small businesses.  If customers search for your services and products on Google, PPC will likely help them to find you.


How does PPC bidding work?

An instantaneous auction takes place every time someone performs a search that includes a keyword that an advertiser is bidding on.  Google has developed a formula that determines placement and cost for the different ads based on four factors:

  1. The advertiser’sMaximum bid on the keyword
  2. Ad and landing page quality
  3. The ad’s expected clickthrough rate
  4. Availability of ad extensions

Here is a video about the auction that Google produced:

As the video explains, this process often results in the the top result costing less than the results below it.


What Each Factor Means

Maximum bid on the keyword

This one is self explanatory.  How much are you willing to pay for a bid?  This doesn’t mean that you’ll pay it; you’ll just end up paying a little more than the result that is right below you.

Ad and landing page quality

If you are bidding on “modular home dealers” and sending people to a page about sheds, your ad will be considered irrelevant and may not run regardless of how much you bid. Additionally, if you are sending people to a page covered in ads and/or poorly-written content, your ad rank score will suffer.  Finally, Google tracks user signals; if large numbers of users click on your ads, leave the site and return to Google to click on other results, your landing page quality score will suffer.

Expected clickthrough rate

If no one clicks on your ads, your PPC efforts will suffer. First, your ad is wasting valuable ad space.  Second, Google knows that a given percentage of users should be clicking on your ads depending on their placements.  If people aren’t clicking on them, there’s likely a reason (i.e. something is wrong with your ad copy).

Availability of ad extensions

Ad extensions are additional text that go below the ad and provide additional information about your offerings.

example of ad extensions

“Services: Project Management, Timeline Creation & View…” and the “Meet Your New Way To Work” are ad extensions.  If you don’t set them up when you configure your Adwords account, you’ll end up regretting it.


How quickly does PPC work?

It varies from industry to industry, but typically, a good Adwords manager can get a PPC campaign driving new leads within a few days of starting up a new campaign.  An even better PPC manager will optimize the campaign regularly, resulting in decreasing costs for the advertiser as the campaign progresses. (See the last section of this article to read an example of how we lowered a client’s cost-per-lead 10x in just a couple months).


Do people actually click on PPC ads?

Yes.  Over 60% of Google’s revenue comes from these sorts of ads.

Additionally, we have several clients whose entire lead generation model centers on PPC ads. While you may usually scroll past these results, our clients have ads with click through rates (CTR) of up to 8%.  In other words, it’s safe to say that for some searches, at least one in ten users click on these paid results.


How much do PPC ads cost?

The cost of a PPC campaign varies, and frankly, “how much does it cost to run PPC ads?” is the wrong question.  The question should be “how much will it cost to get business with PPC ads?”  The cost per click isn’t what matters; what matters in the cost to get a new client.

Since we are dealing with an auction, the cost-per-click will vary based on the bids of your competitors.  Google has a tool called the “keyword planner” that gives some imperfect, but usable data on keywords that you may be interested in targeting.

Take the expected cost-per-click, divide the budget that you think you’ll be able to dedicate to PPC, and that’s the number of clicks you can expect.  Multiply that number by 2%, 5%, and 10% and you’ll have an average, good, and best scenario of your account and the cost to get a customer.


Let’s give an example

Let’s say you’re a local personal injury lawyer.

If you log into the keyword planner, you’ll click on the second box titled “get metrics and forecasts for your keywords.” You’ll type in some of your keywords and get an idea of the costs and likely return on investment.  This is what the interface looks like:

keyword planner ppc


You’ll need to set the location at the top.  It will default to the entire USA, but you’ll change it to the areas you want to reach

keyword planner cost forecast

This tells us that for $800, we’re likely to get 82 clicks.  If we manage to get the following percentages to “convert,” which in this case means contact us, we can calculate a cost per acquisition and return on investment.

  • If we get an average 4% conversion rate, we’re looking at 3 contacts.  If I manage to get half of them to hire me, I’m looking at spending $800 to gain a new personal injury case.
  • If we get a solid 8% conversion rate, we’re looking at 6 contacts.
  • If you manage to get the 10%-20% conversion rates like we get for attorney clients at Sagapixel, you’re looking to pay $50-$100 for a client contact.

A rule of thumb is to aim for a cost-per-acquisition that is no more than 25%-33% of customer lifetime value, so if a new case is worth $5000, you should be aiming to spend no more than $1250-$1666 to acquire a new client.

What industries are PPC ads good for?

If your customers search for your goods and services on Google, it is worth testing PPC ads.  If Google is not part of your customer journey, don’t waste resources.

The personal injury lawyer example from the previous section should run PPC ads.  The land use attorney that helps hospitals get approval to build new offices would likely be wasting his time.

Why would PPC be good for one type of attorney but not another?

In the case of the personal injury attorney, clients are turning to Google to find representation.  In the case of the hospital and its $10 million expansion, it most certainly is not turning to Google to find an attorney.

You need to know your customers and whether they are turning to Google.  If search is not a part of their customer journey, don’t waste money.

[Case Study] An example of how we lowered our cost per conversion from $584 to $45

We inherited a wildly unprofitable Adwords account from another agency.  The client was a regional real estate appraiser that chose his former agency because they claimed to specialize in marketing home appraisers online.  He reached out to us after receiving a recommendation from a attendee at one of our events and granted Sagapixel access to look under the hood at the account.

how to lower cost of adwords
Overall metrics from the previous agency’s campaign over roughly 100 days. $584 per lead.


overall numbers from when Sagapixel managed this ppc account
Metrics after 100 days of having Sagapixel manage it. Cost down to $45 per lead.


A Massively Mistaken PPC Strategy

I log into the account and as always, go straight for the cost per conversion.  In my view, the most important metric of a marketing campaign is its effect on cost per customer acquisition and its relationship to customer lifetime value.  An ad campaign that costs a client $10 to make an $11 sale is rarely going to profitable once fixed costs are factored in.  I ask the client to estimate how much profit is made on a new home appraisal, and learn that his $584 cost per client contact is nowhere near profitable.

Find Stuff to Cut Out


The first thing that I do is look at the time of day and days of the week that have seen the most conversions:

ppc conversions by time of day and day of week
Conversions by time of day and day of week (over lifetime of the previous campaign)

In most cases, I have found that PPC campaigns perform best during certain times of day and days of the week.  This being the case, it would only make sense to concentrate one’s ad spend during these high-performing times.  One look at the previous campaign and it becomes clear that it makes no sense to run the ads during the weekends, since not one conversion was tracked on a Saturday or Sunday over the lifetime of this account.

I also notice that there were no conversions outside the hours of 7am-7pm, and the highest converting times were between 11am and 2pm.  The previous campaign was running 24/7, despite the fact that no one was clicking on the ads and converting:

There were clicks all times of day
There were clicks all times of day; they just didn’t convert

We limited the ads from 8am-6pm, Monday through Friday.


Often, I log into accounts that have no negative keywords, but that wasn’t the case with this account.  There was a healthy list of negative keywords, but there was one clear thing missing: negative keywords generated from search terms that triggered the ads.

A thoroughly managed Adwords campaign has its search terms monitored constantly.  From the nature of the list that I saw, the keywords were clearly a predetermined list that was simply added to the account:

premade negative keyword lists are not a panacea
Clearly, no account manager would add terms related to Utah for a campaign running in NJ; this was a premade list devoid of any NJ-specific keywords.

You need to look for search terms such as the following:

negative keywords from search terms

Real estate appraisers do not do mass advertising.  If a person is searching for an appraiser by name, he or she is likely already a customer of that appraiser or has already received a recommendation from a friend.  Bidding on branded keywords in this industry does not make sense in this case (this was confirmed by the 0% conversion rate for these search terms).  There were no such negative keywords in this account, so we added them (a lot of them).

This is how you do it.  Click on “keywords” on the left bar, then click on “search terms” across the top:

how to generate negative keywords from search terms

Find the search terms that you don’t want triggering your ads, and add them as negative keywords.  That’s it.


There are thousands of blogs out there that explain how to a/b test (or split test) your ads.  I have little to add to that conversation outside of “you have to do it because it really helps.”  I recommend that you start learning about it here.

Today, Our Real Estate Appraiser Has a Profitable Adwords Account

One does not have to be an expert in the real estate, legal services, or construction industry to make PPC work.  The important thing is to make decisions based on the numbers and common sense.  If a keyword, time of day, specific type of device, ad, or anything else that you can use to adjust your bidding doesn’t work, stop bidding.  Cutting out what doesn’t work is almost always the best approach for accounts that have limited budgets and it is likely the best approach for you.



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