What Cost Per Click Can Tell You (And What it Can’t)

Most keyword research tools offer a few data points:

1. A fairly bogus estimate of the number of people searching for the keyword.
2. A completely bogus estimate of how difficult it is to rank for the keyword.
3. A reasonably accurate estimate of how much it would cost to buy traffic on that keyword.

Cost per click looks more reliable because it’s a solid number, generally reported by the search engines, and it’s easy to test. And in some sense, it is. But cost per click is an opaque measure in the sense that all it can do is tell you something about the cost structure, bidding strategy, or ego, of some subset of the bidders. A few of the big variables:

1. A tiny difference in customer lifetime value can make a massive difference in the ideal cost per click for a term. Credit card companies, for example, vary widely in their ability to keep users using. Terms like “Student credit card” will tend to be priced highly in the hope that students will either a) graduate to a different credit card from the same company, or b) run into financial trouble and get bailed out by their parents. The marginal bidder is probably in category a), but figuring out a profitable way to execute category b) is easier.
2. Differences in gross profit margins can show up as differences in cost per click. The high bidder is (usually) someone who can get more profit per click from a given visitor. Since it’s comparatively easy to mimic other people’s conversion-optimization strategies, different bids tend to reflect different margins.
3. Ego is a big factor for many pay per click bidders. People will explicitly bid to be #1 for a term, even if they earn mediocre or negative profits, simply because they think of themselves as #1.
4. On a related note, poorly-optimized automated bidding can have the same effect, as seen here.
5. Funding can make companies price-insensitive. This happened in late 2010 and early 2011 in the penny-auction market: companies would bid indiscriminately on their competitor’s brand names in order to steal market share.

CPC is a window into a firm’s unit economics and profitability, but not into what different products pay for, or where there are arbitrage opportunities. Arbitrage strategies only work for people who have access to all the data—cost per click, conversion rate, gross margin, and customer lifetime value. And anyone with that information is already bidding.