Pay-per-click advertising is one of the most cost-effective methods of getting leads known to Internet business owners. It gives you instant traffic, and allows you to test your business model in real time and make changes fast.

However, at the same time, pay-per-click advertising (or PPC) is not as simple to use as the PPC companies will have you believe. If you jump into the system without preparing for ‘tracking' your results, doing deep keyword research, establishing your ROI and most importantly, testing your ads, you can lose a lot of money before the lights go on.

Here is a brief overview of what you need to know.

The Basics Of Pay Per Click

There are some terms that you need to know if you want to understand any discussion on PPC. Some of these are self-explanatory, some may be foreign. Either way, go through this section and make sure to read those parts that you don't know of.

The PPC Model

In the PPC advertising model, you have three core elements – keywords , ads , and bids . These three elements are combined with "placement" to create an advertising model that displays "relevant" ads on search engines (in response to keyword searches), portals and web sites that opt to display such ads on their pages (the ads to be shown are determined by a keyword analysis of the page).

For a PPC campaign, you need to know the keywords that you are targeting. For example, for a niche site that promotes a time management product, create a list of keywords that included keyword groups containing terms related to time management, productivity, saving time, self improvement and maybe even business soft skills. When it comes to keyword research, you should have a big list so that you capture most, if not all, of your target traffic.

The next step is to write the ad copy for the ads that will be displayed for your searches. The ad copy is extremely important because along with your bid amount, this will determine the "conversion rate" of your ads. Write concise, compelling ad copy that highlights the benefits of your web site / product, and avoid fluff.

Once you have written your click ads, it's time to bid . The bidding mechanism differs from PPC engine to engine, but the idea is the same – your bid amount is the maximum cost that one is willing to pay for each keyword. It's important to know how much you can afford in terms of bidding costs so that you avoid going into bidding wars with your competitors, and also so that you don't spend more than you make through this campaign.

Cost-Per-Click

Cost-Per-Click ( CPC ) is the amount you pay each time a potential customer "clicks" on one of your ads that they see on their search engine results or on web sites. This is often less than the maximum bid amount you set for each keyword.

Conversion Rate

Conversion Rate is the ratio of clicks over impressions which is the number of times your ad is displayed on searches or page loads on web sites. A typical conversion rate is between 2 to 3 percent – that is, for every 100 impressions, you get 2-3 clicks on your ads. You know you have a winner when your conversion rate is 6% and above and hone in on it.

Conversion Rate is closely tied in with the quality of your ad copy , and also with Placement , which I'll discuss next. For e-tailers, many use the term "conversion rate" as the ratio between clicks and conversions to a sale. So when discussing "conversion rates" make sure you clarify if it's for clicks or for shopping cart sales.

Placement

If there is more than one person bidding for a keyword which is almost always the case, the placement of the ads (which ad comes in on the first slot, which comes in on the second, etc.) is determined by bid amounts of each competitor. The higher your bid, the better your placement. Your conversion rate to a certain extent depends on how high your ad is placed on the "rankings" and this leads advertisers to place high bids just to rank at the top. The trouble with this approach is that you might enter into a bidding war with your competitors and lose a lot of money.

Tracking

Tracking refers to measuring which keywords are bringing you the best leads or sales, and which keywords are bringing you ‘window shoppers' – people who are ‘compulsive clickers' and don't buy or sign up. Tracking your ad campaign will help you further fine-tune your ads and improve your ROI.

ROI

Your Return-on-Investment (ROI) is determined by how much you are spending over how much you are earning in net profits from your ad campaign. It's important to establish a base ROI before your start your ad campaign – assume a conversion rate of 1-2 percent – so that you don't over-spend and are able to run this campaign within your budget. Also draw a line in the sand on what to set as your cost-of-sales (COS). It differs for everyone but 15%-25% is a good return. So, if sell something for $100, the cost-of-sales (pay per click budget) should be $15-$25.