What is Smart Pricing?

Smartpricing is an algorithm that Google use to discount the cost of clicks to advertisers, and therefore the payment made to you, the publisher. The algorithm takes account of several factors but Google don't disclose the detail of all those factors, or how they calculate the discount. Some of the factors that we know about are outside the publisher's control - such as the content of the advertiser's landing page. However, there are a couple of factors that the publisher can influence, to some degree: the quality/focus of your page content and, indirectly, conversion rate.

Conversion rate
Advertisers have the ability to define what a "conversion" means for them. It might be the purchase of a product, registration on a database, viewing a certain page or something else. If clicks from your page tend to convert less well, then the price of the clicks on your page will, over time, be discounted and your income will drop.

In taking account of smartpricing, our Adsense Simulator makes the following assumption:

Conversion rates are likely to be lower for highly prominent ads, where the user may click inadvertently, or without expecting to leave your site, or as part of casual surfing.

Conversion rates are likely to be higher for ads that are less prominent, eg: away from the hotzones and more clearly identified as advertisements, where clicking on the ad require a more conscious and deliberate choice by the surfer and there is an expectation that he/she will be taken to another site
You can therefore influence the conversion rate of your page by your ad design and placement.

Getting the balance right
The above assumption means that there are two competing factors when designing a page layout. One the one hand, you want prominent ads that have a high Click Through Rate. A higher click through rate will help increase your income. On the other hand, you don't want too many visitors to be exiting your site inadvertently and converting poorly, which will decrease your income.

For example, suppose you place ads in the middle of the hotzone and make them look like an internal link. Users might click on that link frequently. But when they arrive at a different site they may be surprised and instinctively press the "back" button, thereby not converting. However, if you have a distinct advert outside the hotzone that is clearly an ad, then any user clicking on it is more likely to follow through and convert. However, such ads are likely to be clicked less frequently. If you put them too far from the hot zone, they might hardly be clicked at all, even when the advert has something of interest to the surfer.

Conversion Weight™
To help get the balance right, our Adsense Simulator uses a derived number called "Conversion Weight". You won't find this in any of Google's calculations, but it is a variable in our simulator that can be used to assess the possible smartpricing impact of the design and placement of adverts on your page eCPM.

In the Adsense Simulator, you don't input the conversion weight, we derive it from the Position Weight of each ad slot. However, so that you can take account of Conversion Weight when designing your page, in the next article there is a Smartpricing Simulator where you can input different values of Conversion Weight and see what impact it has