Smart Pricing

13. Smart Pricing... And What It Means For Your Income

One of the more difficult aspects of using AdSense is keeping up to date with changes that Google likes to introduce from time to time. Most of these changes are pretty minor. That doesn’t mean that you can ignore them — you will need to be aware of them. But you won’t usually have to make massive changes to your site and the way you’ve optimized your ads when Google adjusts its policy.

One change that did have a dramatic effect on publishers took place in April, 2004: Google introduced Smart Pricing. We’ve already felt some of its effects in this book. Now we’re going to explain exactly what it means...

First, let me just say that Smart Pricing was a pretty smart move, especially for advertisers. The principle is simple: before Smart Pricing, advertisers paid the price they had bid for each click their ad received on a website... regardless of whether that click resulted in a sale. The result was that some advertisers were receiving large numbers of clicks — for which they were paying large sums of money — but were seeing only a low return on that investment (ROI).

Not surprisingly, they were drifting away to other ad distributors, particularly Yahoo!, in the search for visitors who wouldn’t just click but buy too.

To improve advertisers’ ROI (and win them back from Yahoo!), Google lowered the price of ads on sites that tend to give advertisers few sales, even if they give them large numbers of clicks.

To put it another way, the same ad can now cost different amounts when it appears on different sites. And of course, that same ad will pay publishers different amounts too.

Before Smart Pricing, publishers had focused solely on attracting as many clicks as possible. With Smart Pricing, a site with a high CTR can still earn less than a site with a low CTR.

So how does Google measure an advertiser’s conversion rate and what can publishers do to increase their conversion rates to ensure their ad rates remain high?

This is where things get tricky. Google is playing its cards pretty close to its chest when it comes to the methods it uses to calculate Smart Pricing and even measure ROI.