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Pay Per Click Definition (from Wikipedia):

Advertisers bid on “keywords” that they believe their target market (people they think would be interested in their offer) would type in the search bar when they are looking for their type of product or service. For example, if an advertiser sells red widgets, he/she would bid on the keyword “red widgets”, hoping a user would type those words in the search bar, see their ad, click on it and buy. These ads are called “sponsored links” or “sponsored ads” and appear next to and sometimes above the natural or organic results on the page. The advertiser pays only when the user clicks on the ad.

While many companies exist in this space, Google AdWords and Yahoo! Search Marketing, which was formerly Overture, are the largest network operators as of 2006. In the spring of 2006, MSN started beta testing their own PPC service, MSN adCenter. Depending on the search engine, minimum prices per click start at US$0.01 (up to US$0.50). Very popular search terms can cost much more on popular engines

What Do PPC Agencies Do, Anyway?

Here are some of things that every good PPC agency will do for you:

1. During the Account Set-up Phase

• Creating ads – This is the most time consuming task and is usually 40-60% of set-up charge. This is also the stage where you can identify amateurs from professionals. The click-through-rates of your ads will vary from .5% (very amateurish) to 40% (very professional).
• Exhaustive Keyword Research – To uncover 100-5000 keywords that may be relevant to your business and your customers. This is the second most time consuming set-up task, and forms a 20-40% of the set-up fees charged by most agencies.
• Ad Group Separation – To gain maximum benefit out of your campaigns, it is
imperative that the agency create customized ads for each keyword. When there are more than 50 keywords, the most time-efficient way is to split your entire keyword set into small and highly similar keyword groups.
• Budget analysis – Most PPC agencies will give you approximate sales estimates based on your current conversion rate, competition in industry, and their keyword research.
The more information you’re able to provide your agency, the more realistic their
sales targets will be.

2. During Monthly Retainer Activities

• Bid management – Changing the amount you bid per click and the budget allocated to each engine, depending on current conversion rates and seasonality.
• Improvement of ad copy – Successful campaign managers constantly tweak each ad (for between 2 and 7 months) to maximize its click-through and conversion rate.
• Eliminating non performing keywords – 80% of sales will happen from 20% of the keywords. The agency’s job is to find the worst performing keywords among the other 80% and replace them with new phrases.
• Landing Page Creation / Critique – Campaigns perform well when each ad leads to a customized landing page. Agencies & Consultants charge extra for landing page created ($300-$1000 per landing page). If you’re on a tight budget, use their expertise by engaging them to critique the landing pages done by your in-house team.
• Conversion Strategies – Some agencies specialize in other conversion devices like sales copywriting, white papers, email auto responders, affiliate management etc