AdSense is one-half of an advertising duo that Google has cooked up. The other half is Google AdWords, a pay-per-click keyword advertising program. (How smart is that? Having both advertisers and publishers as your customers!) In a pay-per-click advertising program, advertisers place ads based on keywords that are related to their content. (Keywords, in this context, means key terms or words that are commonly associated with a given subject, topic, service, or product.)
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In pay-per-click advertising, advertisers create short, text-based ads that are very closely related to chosen keywords, and then allow those ads to be shown on other people’s Web sites that feature (in some way or another) the chosen keyword. The advertiser agrees to pay
up to a certain dollar amount — called a bid — each time a Web site visitor clicks on the ad.
Thus, the term pay-per-click. The bid amount an advertiser placed on a keyword is usually determined by two factors: the budget and the popularity of the keyword. The advertisers themselves set the daily budget for each advertisement — one built around how much they are willing to pay if someone clicks the ad. The bidding process itself sets how much a keyword is worth — clearly, more popular keywords are going to cost advertisers more.
The bidding process works much like any other auction process, with one minor change. Advertisers bid for placement of their ads by keyword, but more than one advertiser can win. The way it works is that the advertiser that has the highest bid has their ads shown in
the most desirable places (both on Google and other Web sites). Bidders with lower bids will still have their ads shown, but in somewhat less
desirable places. The “less desirable” places can still perform very well, and in fact are sometimes more coveted because they cost less, which means advertisers can afford to have their ads shown more often.
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