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Smart Pricing

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. 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.

What Google Has Said About Smart Pricing

This is what Google has officially told us about Smart Pricing:

The price of an ad is influenced by a number of different factors.

Those factors can include: the bid price; the quality of the a competition from other ads in the same field; the location of the ad as part of a marketing campaign; “and other advertiser fluctuations.”

The ad price is not affected by the click-through rate. Sending advertisers large numbers of clicks will not increase the bid price. (That doesn't mean that CTR isn't important at all for your revenues; it's just not important in determining the amount you receive for the click.)

“Content Is King.”
Google makes it pretty clear that sites that will benefit most from
AdSense are those that “create compelling content for interested users.” They also emphasize the importance of bringing targeted traffic to look at that content. Those are two different factors which together create a site with loyal, appreciative users...Just the sort of thing that every serious webmaster wants.

What Else Do We Know About Smart Pricing?

What Google has told us about Smart Pricing isn't much. It also raises at least as many questions as it answers: How does Google judge the quality of an ad? How can they tell the role an ad plays in a marketing campaign? What are the other “advertiser fluctuations”? And perhaps most importantly, how do they track the results of the clicks?

All of those pieces of information would be very useful to a publisher. But Google wasn't letting on.

Fortunately, publishers caught a break. Jenstar, the author of an excellent contextual advertising blog at, (you should definitely make this site a part of your regular reading) was contacted by an advertiser who was being tempted back from Yahoo! to Google. He told Jen what the AdSense salesman had told him about Smart Pricing. She told us.

This is what it boiled down to:

Smart Pricing is calculated across an AdSense account. So if you have a number of different sites covering a range of different topics and one of them delivers a low ROI, all of your ad prices may be lowered.

Smart Pricing is evaluated weekly.If you believe that an ad is delivering a low ROI, you can remove it from your site and you should see higher ad prices within a week.

Smart pricing is tracked with a 30-day cookie. Users don't have to convert immediately into a sale (or whatever will count as a conversion) for you to benefit. They can think about it for a month and you'll still get the benefit.

Image ads are affected by smart pricing. Few serious publishers use image ads except when they're receiving CPM campaigns. Was this a reference to ads in low locations receiving lower rates?

Prices may be reduced even below an advertiser's minimum bid. So looking up the bid prices for targeted keywords won't help you very much; if your ROI is low, your rates could be lower than the minimum quoted.

Conversions accounts are tracked by advertisers opting into AdWords Conversion Tracking. But we still don't know what Google is tracking or how it's making calculations with its results.

Strategies To Benefit From Smart Pricing

The challenge for publishers trying to keep their ad rates high is that there's no way to know exactly how many of your clicks are converting into sales for your advertisers. You can't even tell what would count as a sale for the different advertisers you're promoting.

The best you can do is keep track of your clicks and your revenues, and make sure that they rise and fall at the same rates.

If following your stats was always important, Smart Pricing has made it absolutely vital. There's little point in spending hours trying to increase your CTR if the value of your clicks is dropping like a rock.

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