There have been quite a few discussions on the web recently about Smart Pricing.
A quick overview of AdSense / AdWords smart pricing:
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.
Source: AdWords Learning Center
Google Launches Contextual Network – June 2003
Starting today, AdWords ads will also appear on sites that are accepted into our ad network through our new Google AdSense program. These websites are reviewed and monitored according to the same rigorous standards as our current network sites. And your AdWords ads will continue to appear only in relevant places that make sense to web users. The only difference is that now your ads will be targeted to more content web pages, bringing you even more customers.
Source: AdWords News Archives
Google Launches Improved Smart Pricing – April 2004
We’re introducing automatic price adjustments for certain clicks you get from the Google Network. Google’s smart pricing model has always provided better placement for better performing ads, and reduced the cost of a click to the least amount possible to stay above your competitor’s ad. And now, with no change in how you bid, Google may reduce the cost for a click if that better reflects the value it brings to advertisers like you.
Source: April 04 Google AdWords Newsletter announces Improved Smart Pricing.
Google Defends Smart Pricing – October 05
The blog entry lists a few reasons on how smart pricing is determined, however, as an advertiser, the last line is my favorite:
The best way to ensure you benefit from AdSense is to create compelling content for interested users. This also means driving targeted traffic to your site — advertisers don’t gain as much ROI when paying for generic clicks as they do for quality clicks that come from interest in your content. Good content usually equals a good experience for user plus advertiser, which can be much more valuable than CTR.
Source: Inside AdSense