RPC, CPC and the margin maths

Strip away the jargon and search arbitrage is one subtraction: what a visitor earns minus what a visitor costs. Everything else in this track is detail around that subtraction. The difficulty is that the earning side is not one number. It is a chain of three, and a small slip in any link changes the answer.

A greengrocer buys a crate of apples for a fixed price. Some are bruised and unsellable. Some customers look and walk away. The price on the label only matters for the apples that actually leave in a bag. To know if the crate was worth buying, the grocer divides the money in the till by the number of apples in the crate, not by the number sold.

1. Two prices for the same person: A click on a social app might cost $0.20. A click from the same person on a search ad might be worth $1.00 to an advertiser. Search arbitrage lives in that gap, like a trader who buys fruit at the farm gate and sells it in the city (all figures here are illustrative).
2. Buy a visitor: The arbitrageur runs an ad on a traffic source and pays for each click. Say the cost per click is $0.20. That money is spent whether or not the visitor ever earns anything back.
3. The visitor lands on a page: The person who clicked arrives on the arbitrageur’s landing page: usually a short article with a block of related search topics underneath.
4. A search shows sponsored results: If a topic interests them, the visitor taps it and sees a results page. The ads on it come from a search feed: the same advertisers who bid on a big search engine, shown on this smaller site.
5. The advertiser pays for a click: The visitor clicks one sponsored listing and goes to the advertiser’s site. The advertiser is charged, say, $1.00. This is the only moment in the loop when new money enters.
6. A share comes back: The search engine and the feed provider keep their cuts and the arbitrageur receives, say, $0.56 for that ad click: the RPC. But only about half of visitors click an ad, so the average visitor earns $0.28 (RPV).
7. What is left is the spread: $0.28 earned minus $0.20 paid leaves $0.08 per visitor: the spread, a 40% ROI. Across 10,000 visitors a day that is $800. If the ad price rises to $0.30 or fewer people click, the same loop loses money just as fast.

The four numbers

• CPC (cost per click): what you pay the traffic source for one visitor. This is the crate price per apple.
• Lander CTR: the share of visitors who click a search term on your page and so reach a results page with ads.
• Ad CTR: the share of those searches that end in a click on a sponsored result. Only these earn money. Each is a monetised click.
• RPC (revenue per click): what you receive for one monetised click, after the search engine and the feed provider have taken their revenue share.

A worked example

Say you buy 1,000 visitors at a CPC of $0.20. All the figures below are illustrative, chosen to make the arithmetic easy to follow.

Three ways of stating the same result appear in that table, and people mix them up. ROI compares profit with cost: 20%. ROAS compares revenue with cost: 120%. Profit margin compares profit with revenue: 16.7%. A buyer who says they run at 20% and one who says they run at 120% may have identical campaigns.

The shortcut: revenue per visit

Multiply the three earning links together and you get what one bought visitor is worth: RPV = lander CTR × ad CTR × RPC. Here that is 0.40 × 0.50 × $1.20 = $0.24. This single figure is the centre of the business. If CPC is below RPV, the campaign makes money. If CPC is above it, the campaign loses money. The break-even point CPC is simply the RPV.

How thin the margin is

A four-cent spread on a twenty-cent click sounds comfortable until you move one input slightly. Hold everything else in the example still and change one thing at a time.

A rise of four cents in click cost, a fall of twenty cents in RPC or a seven-point drop in lander CTR each wipe out the whole profit. None of those moves is unusual. Click costs shift with auction competition, RPC shifts with advertiser budgets and with how the feed rates your traffic, and lander CTR shifts whenever the creative attracts a slightly different crowd. That is why arbitrage is managed daily and why the unit economics have to be recalculated constantly.

Where the advertiser’s money went

The $1.20 in the example is not what the advertiser paid. Suppose the advertiser paid $2.00 for that click. The search engine keeps a share, the feed provider keeps a share of what remains, and the publisher receives the rest. The exact splits are set by private contracts and vary, so treat any figure you hear as specific to one deal. The publisher's view of RPC is always after those cuts.

1. An advertiser pays for a click: Someone clicks a sponsored listing on an arbitrage page. The advertiser’s account is charged $1.00. Every figure in this flow is an example: real shares differ by contract and most are confidential.
2. The search engine takes its cut: The engine supplied the advertisers, the auction and the billing, so it keeps a slice first. Say it keeps $0.30 and passes on $0.70. What it pays out to partners is its traffic acquisition cost.
3. The feed provider takes its cut: Most arbitrageurs do not contract with the engine directly. A feed provider does, and shares the feed onward for a revenue share. Say it keeps 20% of the $0.70: $0.14.
4. What the arbitrageur receives: The arbitrageur gets $0.56 for that ad click, its RPC. Only about half of its visitors click an ad, so average revenue per visitor (RPV) is $0.28. That is its gross revenue.
5. Most of it was already spent: Each visitor was bought from a traffic source for $0.20, paid up front. So the largest single share of the arbitrageur’s income goes straight back out to an ad platform.
6. The spread: $0.28 in, $0.20 out: $0.08 per visitor is the spread, before staff, tools and content costs. Out of the advertiser’s dollar, the business that built the page keeps the thinnest slice and carries the most risk.
7. Invalid clicks unwind the chain: If the engine later decides a click was an invalid click, it credits the advertiser and nobody downstream is paid for it. The arbitrageur sees that as a Clawback (revenue deduction), even though the $0.20 spent on the visitor is gone.