Pay-per-click advertising (PPC) is widely considered the most cost effective ways of targeted internet advertising. According to Forbes Magazine, PPC accounts to 2 billion dollars a year and is expected to increase to around 8 billion dollars by the end of 2008. But does pay per click really work?

PPC advertising is based on the concept you bid on keywords and you pay only when people click on your website using the keyword. On the surface this idea makes sense. But does it? Despite the hype I believe PPC doesn't work for most people. Here's why.

Despite what PPC supporters say there are two things they don't tell you. First, they never tell you that at least 99% of your visitors will never buy from you. The average conversion rate for most websites is between 0.5% and 1.0%. Second, you have to take click "fraud" into account. According to Click Forensics, an Austin, Texas-based click-fraud auditing firm, found that the click "fraud" rate for search engine ad networks alone, including Google AdSense and Yahoo Publisher Network, is a whopping 27.8 percent. According to this data, nearly one out of every three clicks on a Google or Yahoo ad is fraudulent!

Search engines, like Yahoo! and Google, underestimate click "fraud" for obvious reasons. People want to avoid anything with high fraud attached to it. Also, admitting fraud means less money comes in from new customers and more money paid to current and past defrauded customers. Therefore, it is not in the best interests of the search engines to admit or actively combat fraud, especially since this type of advertising accounts for most of their revenue. Also, the word "fraud" really is a misnomer. Unlike wire fraud, mail fraud or bank fraud, you can't be jailed for click "fraud." Nevertheless, it's probably the best term to use.

Now, let's do the math to determine if PPC is right for you. Since, the average conversion rate for most websites is between 0.5% and 1.0%, let's take 0.8% as our conversion rate. This means that you need approximately 125 visitors per sale. Most advertisers charge a minimum bid of 10 cents per keyword. To be seen more often you must pay a higher amount. So let's take 20 cents as our average bid. Let's say that 1,000 visitors click on your site with the 27.8 percent click "fraud" rate. Here's the formula:

1,000 clicks x 27.8% click fraud rate = 278 fraudulent clicks

which means

1,000 clicks - 278 fraudulent clicks = 722 legitimate clicks

722 legitimate clicks x .75% conversion rate = 5.8 conversions

1,000 clicks @ 20 cents per click = $200 in PPC spending

Whether the clicks are fraudulent or not, you still have to pay for them. Therefore, if you get 5.8 conversions per $200 spent on PPC ($200/5.8 conversions), this means that you have to make approximately $35 profit per sale to justify your PPC spending. This means that if you're selling something for $20, PPC is not for you. If you're selling something for $50 but it costs you $35 to make it, PPC is not for you. PPC only works if you can make a high profit per sale.

Based on these calculations, if you want to make PPC worth it, you have to either raise your conversion rate (which will increase the number of conversions) or lower your bid per click. The number of clicks is irrelevant. We are often told that using better, more defined keywords helps. This is debatable because most clickers won't buy from you right away.

When you read articles, magazines and websites it is almost universally professed that PPC is the most cost-effective form of advertising. It makes perfectly logical sense. But upon further review, they don't take into account conversion rates and click fraud. I don't know if it's on purpose or not, but I do know that you must take these two things into account. Even if your website looks and is great, most clickers won't buy from you right away, anyway. So, when you consider that on average 28% of your advertising dollars are wasted due to fraud and that over 99% of your remaining 72% of your advertising dollars leads to no sales, this means that whatever sales you make have to count! And if the ones that buy don't make you a significant profit, then PPC is a waste of money. And for most, it is.