Basics of SEA

Search Engine Advertisement (SEA) versus Search Engine Optimization (SEO)

Search engines distinguish between two kinds of search results: organic search results and paid search results. An advertisers effort to get his site to the best position in the organic results is called “Search Engine Optimization” (SEO). The effort to get to the best position in paid search results is called “Search Engine Advertising” (SEA). Figure 1 shows the placement of organic results and advertisements on a Google Search result page.

To get a higher rank on free organic results (SEO), the focus is on improving the website’s content and to ensure that the website is linked from other websites with similar content. On the other hand, SEA requires the use of a Google AdWords account. It focuses on improving campaign structures, keywords, ads and landing pages to match the users’ desires.

SEO vs SEA

Fig. 1: Google Results page

How SEA works

SEA belongs to the field of Pull-Marketing. Advertisers intend to capture the interested potential customer, who is already searching the web for his desired product or service. Keywords are written to anticipate the customers’ search query and provide an exact advertisement. The more precise the booked keywords and ads are, the higher the effectiveness of the corresponding campaigns will be. The goal is to improve the customer’s shopping experience by offering him a fast, precise buying process – search, click and purchase.

Main terms and concepts

Total number of times an ad has been shown
Total number of times an ad has been clicked
Whenever a user performs a specified action on your website, e.g. he or she places an order or signs up for a newsletter, then you have a conversion. Conversions often relate directly to the sales of your website.
The Conversion Rate is the share of clicks that led to a conversion. It is calculated through the following formula:

cr 

The Average Position is the weighted average of the average position of each ad associated to the considered item. It is calculated as:

avg pos

The Clickthrough rate (CTR) reflects the relation between how often your ad has been clicked and the number of times it was shown. It is calculated as:

CTR 

The Quality Score (from 1 to 10) is the basis for measuring the quality of your advertisement and influences your actual cost per click. QS is determined by several factors, including keyword and ad text relevance, historical keyword performance, etc. Oftentimes, a higher QS leads to a lower CPC.
The ad rank determines the positioning of a particular ad relative to other ads in a particular search engine result. The ad rank is defined as:

ad rank

Under the cost per click (CPC) pricing model, AdWords charges you for each click your ads receive. No costs occur for only displaying the ad without being clicked. CPC bidding is the default for ads running on any Search Engine Network (Google, Bing etc.).
It is the highest amount that you are willing to pay for a click on your ad. You can choose to set a maximum CPC on an adgroup level. Please note that the CPC you end up paying is usually lower than the maximum CPC. (More about Bidding
Average Cost per Click is the average of all generated costs divided through all generated clicks. It is the average price you have paid per click.

Avg cpc

Cost per Order (CPO) is one of the most important indicators in order to evaluate your campaign performance. It reflects the amount you have spent in order to generate one order. It is given by:

CPO 

Cost per Lead (CPL) is a very important indicator of campaign performance. It reflects the amount you have spent in order to generate one lead (e.g. telephone numbers, emails, so on). You calculate it through the following formula:

CPL

CAC reflects how much money we spend on average to acquire one customer.

RPO is the average basket size of a user. It is calculated as:

RPO

RPC is the expected value generated by one click on our ads. It is calculated as:

RPC

The CLV is the expected value of how much revenue one can generate from a user during her whole lifetime. This value depends on the business model.  Even if the RPO is at the moment lower than the CPO, the actual cost of acquiring a customer might be covered by her future purchases.
The CRR shows how many Euros you spend to generate €1 of revenues. This ratio should be between 0 and 1. For values greater than 1, we should get a warning because we are wasting money.

CRR