From the AdWords Learning Center:
[google.com...]

Because contextually targeted ads on our content network sometimes return lower conversion numbers than ads on Google.com search results pages, clicks from the content network use "smart pricing" adjustments. Google's smart pricing technology automatically lowers the cost of content clicks based on the referring site, to maximize the return on investment for advertisers.

If our data shows that clicks from a particular content page are less likely to return results, our system automatically reduces the price the advertiser pays for those clicks. The AdWords system takes the work out of CPC bidding, helping to ensure strong return on investment no matter where your ads appear. Smart pricing adjustments are automatically reflected in the average CPC for content targeting shown in the Campaign Management interface.

For example, let’s say you advertise digital cameras. Your ad appears on two different pages – one that reviews digital cameras and another that offers photography tips. Since users are more likely to click on your ad beside digital camera reviews (and thus convert into more sales), Google doesn’t discount these ads. However, Google determines that clicks from the page of photography tips convert into sales less frequently and therefore charges you less per click.

[edited by: encyclo at 1:18 am (utc) on Aug. 8, 2008]
[edit reason] added link to source [/edit]

thanks netmeg, i think i have seen that but it looks like this whole "smart pricing" thing works based on guesses. they can never be sure if someone from the photography tips site wont purchase anything, and it looks like adsense doesnt track the user activity any further than that...i am still new to adsense, and would like to know if this "smart pricing" is already an improved version. thanks again.

Google has so much data they know what you're going to do before you do it.

Of course it's a guess, but it's a pretty educated one.

it looks like adsense doesnt track the user activity any further than that

Depending on how the advertiser has things set up Google can track the click all the way to the confirmation page.

As for whether it's an improved version, well, we never knew exactly how it worked in the first place and really have no idea whether it's changed since then or not.

i think i have seen that but it looks like this whole "smart pricing" thing works based on guesses. they can never be sure if someone from the photography tips site wont purchase anything

Smart pricing isn't based on "guesses", it's based on statistical probability. And Google doesn't have to be "sure" that nobody will purchase anything after clicking an ad on a given site or type of page--an informed projection, based on research data that Google has acquired over the years, is good enough.

BTW, smart pricing was introduced more than four years ago, so don't expect it to go away soon.

thanks to you all.
i am just trying to understand how it really works. is google trying to start their own affiliate programs? looks like they are more than capable of doing that, or do they already have one?

Hello blurblade,

You may find this blogpost [adsense.blogspot.com] - in which we try to dispel common misconceptions about smart pricing- useful.

Looks like you have a lot of catch up reading to do, blurblade ;-)

Google Affiliate Network [google.com]

Thanks ASA and jimbeetle! I am so glad that I have posted this question. Will check out those pages right now! =D thanks again

I am so glad that I have posted this question.

And once you've read up on it and see it in action on your site you will then understand why some people call it Stupid Pricing (TM)!

lol HuskyPup
it's always good to ask. i learned.

Before there were computers, when smart pricing was done by people, it was called "what the traffic will bear."

No matter what their explanation it will remain a black box that says "take it or leave it."

No matter what their explanation it will remain a black box that says "take it or leave it."

No, it will remain a black box that says "You're going to be paid what your traffic is worth." That's good for advertisers, it's good for Google, it's good for publishers whose traffic converts, and it ultimately raises the quality of the network by discouraging participation by publishers who deliver poor-quality leads.

When AdSense was launched in 2003, every "content network" click was billed at full retail, regardless of what the click was worth. That policy wasn't sustainable, and it was inevitable that Google would develop ways to make AdSense more tempting to advertisers by bringing prices into line with anticipated value.

advertisers don't gain as much ROI when paying for generic clicks

I think that the reverse is also true: That is, publishers don't achieve a high CPC when generic ads are displaying.

The stranglehold of smart pricing will not relent until the supply of publishers begins to diminish. Google is being very smart about maximizing their profits. Your diminishing earnings follows their learning curve.

what are you guys doing to avoid being smart priced?

No matter what their explanation it will remain a black box that says "take it or leave it."

Yep. One of my biggest complaints re. Adsense is its intransparency. They [Google] can do whatever they think is good for them. As long as they are pretty much the only shop in town, there is no need for them to open the black box. I mean, it's convenient: need to earn a few millions on top? Turn down that "eCPM knob" for certain sites!

BTW, it's no surprise to me that again the advertisers got additional tools, while even the most basic feature requests have not been implemented on the publisher site for ages (e.g. bigger filter). Even ASA has realized that it does not make sense to collect feature requests from publishers more than twice a year, so I am not going to hold my breath waiting for Google to change their product.

Indeed, Adsense will remain a black box that says "take it or leave it."

It's time for a competitor. Microsoft, could you PLEASE get your act together now and DO something?

It's time for a competitor. Microsoft

I really don't think this is the answer, as the resulting competition will include strategies aimed at appeasing advertisers not publishers.

One wonders how smart smartpricing really is:

Look at it this way: Google says it displays the best fitting - best income generating ads for your site. Yet how many times do we see an stupid ads like "Top Widgets - get them here" that pay peanuts and have a ctr of ziltch get placed before quality ads? Is that smart? Now tell me; If Google's targeting and placement algo can't get that right, how the hell is it suppose to pull off something as complex as Smartpricing?

If Google's targeting and placement algo can't get that right, how the hell is it suppose to pull off something as complex as Smartpricing?

It seems to me that you're comparing apples and oranges. Matching ads to a page is a lot more complicated than than making assumptions about conversion based on past performance, IMHO. But in any case, it doesn't matter: As long as advertisers are happy and the system works reasonably well, that's good enough. And if some publishers hate smart pricing enough to leave (because Google places a low value on the leads they generate), then how is that a bad thing for Google or its advertisers? Adsense already has a dominant market share, so Google can afford to let natural selection cull the herd.

...so Google can afford to let natural selection cull the herd.

In fact, they can't afford not to. While I sometimes express bitterness and anger over my place the process I certainly understand that it is a necessary evil and that if they didn't take every advantage they wouldn't be able to pound Yahoo and Microsoft into the dirt.

Being number one means crushing the competition and annoying your partners, frankly I'd rather be annoyed than crushed.