An Intro to Paid Search by’s SEM Analyst

Search Engine Marketing SEMSearch engine marketing is an important focus for us at In an effort to make sure everyone in the company understands what it really is, I presented an overview of paid search during one of our lunchtime learning sessions. So I figured, why not share it with all of you as well?

This presentation was designed for people who have heard about SEM but do not have direct knowledge about it. We explored the very basics of how search engine marketing works, and all the basic tenants of paid search. Here’s the rundown.

What is paid search?

  • Paid search, or search engine marketing, is the management of ads that show next to organic search engine results. Advertisers can get traffic to their website on a cost-per-click basis.
  • Like anything, paid search takes time and money to run effectively.
  • Typically users that search for a keyword on a search engine have high intent. They either wish to buy an item or wish to learn more about something. This is one of the advantages of paid search compared to other paid advertising channels.

Some facts and figures about paid search:

  • Google owns 2/3 of the US market share for search engine traffic. Bing owns just less than 1/3.
  • There are 40,000 search queries on Google every second.
  • Google’s advertising revenues in 2012 were $42.5 billion.

As you can see, there are a lot of people searching for things, and advertisers are willing to pay real money to get those people to come to their website.

What can you use paid search for?

  • Ecommerce/Retail: Amazon, Macy’s, Nike all use paid search to drive product sales
  • Lead Generation: We use paid search here at to identity people interested in a product and service. Then we match these people with advertisers that provide that service
  • Website Traffic/Branding: Companies can send paid traffic to their website to increase brand awareness

Others have also used paid search to drive people to special offers on their website, to collect emails for their database or to collect donations. The uses of paid search are only limited by the website that the paid click drives to.

Here’s an example of a paid search ad:

Example of paid search ad

You have undoubtedly seen this screen before. After searching for a keyword (in this instance, “Nike running shoes”) you are shown a screen with a combination of ads and organic search results.

Notice that the paid ad space takes up a majority of the screen. When these ads align with exactly what the user is looking for, that’s when people will click on your ad.

Paid search management is all about matching a compelling ad to the relevant keywords.

If you are a business, you’ll have to balance your costs with your revenue. Each paid search click costs you money. So, you must think about how much you are willing to pay per click. This depends on your average revenue per visitor, or some other performance metric you are trying to optimize for.

When you choose the keywords you wish to advertise on, you can set a maximum CPC (cost per click) for each keyword. We’ll go over that, and some other details about the economics of paid search in the next section.

Basic Terminology

For clarity’s sake, let’s go over some basic terminology:

  • Keyword: the search query that you choose to show ads on.
  • Ad: the ad you write which will be shown for keywords that you bid on.
  • Max CPC: the maximum amount of money you are willing to pay if someone clicks on your ad.
  • CTR: Percentage of the time users click on your ad (as opposed to clicking on organic results or someone else’s ad).
  • Quality Score: the search engine’s 1-10 measure of the relevancy of your ad. This number is calculated mainly from your adcopy’s CTR, but also factors in your landing page experience, and a few other lesser factors.SEM example max CPC

Now that we’ve gotten some definitions out of the way, let’s take a look at what’s going on under the hood.

The Auction

Every time a user searches on a search engine, there is an auction that takes place in a fraction of a second. The advertiser with the highest ad rank gets shown in the number 1 ad spot. The advertiser with the second highest ad rank gets put in position 2, and so on.

Here is the formula for calculating your ad rank for a given keyword you are bidding on:

Max CPC * Quality Score = Ad Rank

This is a simple and elegant system that rewards advertisers for 1) bidding more money or 2) having a more relevant ad.

At the same time that Google calculates your ad rank, they also calculate the ad rank for all the advertisers that are competing with you. At the end, it shows ads in order of their ad rank.

Using The Auction To Your Advantage

This formula has a few implications for the achievement of your goals. As a marketer, your goals are probably something along the lines of this:

1) You want your ad to be seen by and clicked by as many people as possible and;

2) You also want to pay the least amount of money possible for each click.

The interesting thing is that these two objectives are actually contradictory. According to the formula above, if quality score is equal across all competitors, you need to increase your max CPC to get a better ad rank. So, you pay more money per click. Compounding this, the higher ad rank will cause your ads to get more clicks due to being in a higher position, and those additional clicks will cost you even more money.

Consider the opposite situation. If you bid lower, you will pay less money per click. But then your ad will be shown on a lower position on the page so you will also get fewer clicks, which will also decrease your advertising costs. Thus, the decreased CPC and decreased click volume work together to lower your costs.

As a search marketer, you have to strike a balance between price per click and the click volume you get. If you try and earn the number 1 or 2 spot all the time, you will need to bid high and that will cost you.

Can you afford the top ad positions? Often times it is much better to show ads on a lower position, because the price per click lends itself to overall profitability.

Closing Thoughts

We have just scratched the surface of search engine marketing. Search engines are collecting all sorts of data on user behavior and make it available to their advertisers so that they can improve their paid search efforts. Some advanced topics include:

  • Ad copy testing: testing different ad messaging to improve click-through-rate
  • Geographic targeting: analyzing ad performance segmented by geographic region
  • Time of day optimization: analyzing performance based on time of day or day of the week
  • Ad extensions: managing add-ons for your ads that increase its credibility and visibility. These often take the form of modules that convey your company’s Google+ rating, store address, or number of followers on social media next to your basic ad text.

All in all, the data driven nature of paid search and the real-time auctions are what set it apart from traditional media buying. Check back here periodically for future articles on more advanced topics in paid search.

Questions? Feel free to leave one in the comments section.

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