How Do Pay Per Click Search Engines Work?

To best explain how pay per click search engines work, we will present the following example:

Sally (Internet) Surfer is looking for an eBiz that sells birthday candles. She goes to a search engine such as Overture or LookSmart, which are pay per click search engines. Sally might not even be aware of how Overture sorts their listings; she just likes the relevant search results she always seems to find there.

At Overture, she types "birthday candles" into the search box and is presented with a page of search result listings.
Meanwhile, Ernie Entrepreneur runs an eBiz named Ernie’s Candles where he sells all kinds of candles online including birthday candles. He has previously signed up for Overture’s listing services and has bid on various keywords related to the products he sells including the two-word term "birthday candles." He was allowed to bid any number of pennies on the term "birthday candles" and he chose a bid of 5 cents. (You will understand this better shortly.)

When Sally looks down the list of search results, the first listing is a wax manufacturer called "Wendy’s Wax Supplies" that supplies wax for birthday candles. It has a $.10 notation at the end of its short company description meaning that this company bid 10 cents for this term. The second listing is for "Ernie’s Candles." At the end of Ernie’s self-description of his company is the $.05 notation since Ernie bid 5 cents. Then, the next listing is for another candle store, "Steve’s Candle Sticks" with a $.01 notation as Steve has only bid 1 cent on the term, "birthday candles." As you may have noticed, the companies are listed in order of their bids with the higher bidders coming up first.

Sally scans down the list of search results and notices that the second listing is for Ernie’s Candles. It seems like an ideal eBiz for her and she clicks on it, taking her to Ernie’s Candles’ homepage. At this moment, 5 cents is deducted from Ernie’s listing account and transferred into Overture’s coffers. If Sally had clicked on Wendy’s or Steve’s company listings instead, Ernie would have not been charged at all, but instead, either Wendy would have been charged 10 cents or Steve would have been charged 1 cent. Hence the name "pay per click search engine."