Google updates PPC with CTR and past statistics it collects, but it is not clear how exactly and precisely Google determines the PPC for AdWords and AdSense.
Could anyone explain it in detail, preferably with an example?
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The cost per click (CPC) is determined by those bidding on the term in an auction format. This means that a bid can open as low as $0.05, with users then trying to outbid each other for rank.
Example: User A sets a max bid of $0.25 per click for "keyword". User B wants the top paid position and sets their bid for $0.30. User A now has to decide whether they want to increase their bid to at least $0.31 per click, or take position 2 at their bid.
A quality score is used by Google which slightly alters this by taking into account the historical relevancy and results of bidding, so in some cases someone bidding lower than another person can actually outrank them.
Adsense uses an "eCPM" (effective cost per thousand) to "back into" the revenue figure. Whereas traditional CPM advertisers will pay $X per thousand impressions regardless of performance, Google will serve an ad 1,000 times, and depending on how many clicks it gets will then use this to figure the effective CPM.
Example: Ad A is shown 1,000 times and is clicked once. The ad that was clicked has a CPC of $10. Google pays a 68% share to Adsense for Content users, so in this case pays out $6.80.
This means the "effective" CPM is $6.80.
I thing that information on how exactly and precisely Google determines cost of any particular click is basically their proprietary algorithm.
But general factors that are affecting your ad position and your actual cost per click are:
These 4 basically form your Ad Rank
Then your Bid + Ad Rank will determine your ad position, thus your actual Cost-Per-Click (since even you bidding higher the actual cost will be just enough to overbid your following competitor)
Here how it is explained by Google's Chief Economist