How Paid Advertising Works
Paid advertising buys attention: you pay a platform (Google, Meta, LinkedIn, Microsoft, YouTube, TikTok) to show your message to chosen people. Done well, it brings customers predictably. Done badly, it spends money quickly and quietly. This module gives you the maths to tell the difference.
Ads are auctions
Every time a page with ad space loads or a search is made, the platform runs an auction in milliseconds. The winner is not simply the highest bidder: platforms combine your bid with the quality of your ad (how relevant and engaging it is likely to be) and the expected result. On Google this is shown as Quality Score (1 to 10) and Ad Rank. A better ad can win a higher position for a lower price than a weak ad with a bigger bid. Relevance pays.
The metrics, in plain language
| Metric | Formula | Meaning |
|---|---|---|
| Impressions | How many times the ad was shown | |
| CTR (click-through rate) | clicks ÷ impressions | How appealing the ad is to the people who see it |
| CPC (cost per click) | spend ÷ clicks | The price of a visitor |
| CPM (cost per mille) | spend ÷ impressions × 1,000 | The price of 1,000 views (common on social) |
| Conversion rate | conversions ÷ clicks | How well the landing page turns visitors into leads |
| CPL / CPA (cost per lead / acquisition) | spend ÷ leads (or customers) | What a result really costs |
| ROAS (return on ad spend) | revenue ÷ spend | Money back for every dollar spent |
Clicks are not the goal; customers are. A campaign with cheap clicks and no leads is worse than an expensive one that fills the calendar.
Work out what you can afford (do this first)
Start from the value of a customer, not from a budget you hope will work.
Worked example: a website project is worth $1,800 setup plus $99 a month. Customers stay on the plan for 18 months on average.
- Lifetime value (LTV) = $1,800 + 18 × $99 = $3,582.
- You decide to spend at most 20% of that to win a customer: maximum cost per customer (CPA) ≈ $716.
- Your sales calls close 1 in 4 qualified leads, so you can pay up to $716 ÷ 4 = $179 per lead.
- Your landing page converts 5% of visitors into leads, so you can pay up to $179 × 5% = $8.95 per click.
If keyword research shows clicks cost $3 to $6, the channel can work. If they cost $15, you need a better landing page, a better close rate or a different channel before you spend.
Budget for learning
Every new campaign needs a test budget to collect data. A rough guide: enough to get at least 50 to 100 clicks per ad group, or around 50 conversions per month on social platforms before automated bidding works well. Start small, set a daily budget cap, and never launch without conversion tracking (module 4).
Where each platform fits
| Platform | People are... | Best for |
|---|---|---|
| Google Search / Microsoft Ads | actively searching for a solution | High-intent leads ("web developer for clinics") |
| Meta (Facebook, Instagram) | browsing, not searching | Local awareness, visual proof, retargeting |
| at work, in a professional mindset | Reaching decision makers by job title and company size (expensive) | |
| YouTube | watching, learning | Demos, explainers, brand trust |
Exercise
Calculate the maximum cost per click for one of our services using the worked example: your own LTV, a target CPA, your close rate and your landing page conversion rate. Write down what would have to change if clicks cost twice that.
Check yourself
- Why can a cheaper bid beat a bigger one in an ad auction?
- What is the difference between CTR and conversion rate?
- Work backwards from LTV to a maximum cost per click.
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