Tag: Production & Total Quality Management BMS Notes

Management Notes

Income from Profession: Rules, Procedure

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According to section 29, the profits and gains of a profession are to be computed in accordance with the provisions contained in sections 30 to 43 D. It must, however, be remembered that in addition to the specific allowances and deductions stated in sections 30 to 36, the Act further permits allowance of items of expenses under the residuary section 37(1), which extends the allowance to items of expenditure not covered by sections 30 to 36, where these are allowable according to accepted commercial practices.

Profession means exploitation of ones skills and knowledge independently. Profession includes vocation.

Professional Income is income from exercise of any profession or vocation which calls for an intellectual or manual skill. It covers doctor, lawyers, accountants, consulting engineers, artists, musicians, singers etc.

The expression ‘Profession’ has been defined in Section 2(36) of the Act to include any vocation. In the case of a profession, the definition given in the Act is very much inadequate since it does not clearly specify what activities constitute profession and what activities do not.

According to the generally accepted principles, the meaning of the term ‘profession’ involves the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the operator.

For instance, an auditor carrying on his practice, the lawyer or a doctor, a painter, an actor, an architect or sculptor, would be persons carrying on a profession and not a business.

The common feature in the case of both profession as well as business is that the object of carrying them out is to derive income or to make profit. The process of making the profit would be the main area of difference between the two while the ultimate object is common to both

Profession [Section 2(36)]

A profession is an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, e.g., lawyer, accountant, engineer, surgeon, author etc. So, profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Under section 2(36) profession includes vocation.

Vocation simply means a way of living for which one has special fitness. A vocation does not involve any organized or systematic activity like business. So vocation simply means any type of activity in which a person is engaged and he earns his livelihood from such activity. The practice of a religion may also amount to vocation. Writing of articles in the magazines is also a vocation.

Profession involves an exercise of intellect and skill based on learning and experience. It requires purely intellectual skill or manual skill on the basis of some special learning.

Profession includes services provided by the professionally qualified or technically qualified person according to their qualification.

There are certain basic rules that apply when you are assessing your taxable income from profession, these are as follows:

(i) Continuation of Profession

The chargeability to tax under Section 28 is based primarily upon the condition that the assessee must have carried on a profession at any time during the accounting year, though not necessarily throughout the accounting year.

(ii) Existence of continuity in the business or profession is not an essential condition

The existence of continuity in the profession is not an essential condition for making the assessee liable to tax under this head. Thus, receipts arising from the exercise of a profession would still be chargeable to tax under this head although they may be both casual and non-recurring in nature.

(iii) Profession must be carried on during the previous year

Income is chargeable under the head “Profits & gains of business or profession” only if the business is carried on by the assessee during the previous year. It is not necessary that the business should continue throughout the year or till the end of previous year.

Maintenance of books of accounts

Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act. [Section 44AA(1)]

Professionals carrying on the professions are required to maintain books of accounts in accordance with Rule 6F of the Income tax Rules.

Books of account [Rule 6F]

BOOKS OF ACCOUNT AND OTHER DOCUMENTS TO BE KEPT AND MAINTAINED UNDER SECTION 44AA(3) BY PERSONS CARRYING ON CERTAIN PROFESSIONS.

6F. (1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2):

Provided that nothing in this sub-rule shall apply in relation to any previous year in the case of any person if his total gross receipts in the profession do not exceed one lakh fifty thousand rupees in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount.]

(2) The books of account and other documents referred to in sub-rule (1) shall be the following, namely:

(i) a cash book;
(ii) a journal, if the accounts are maintained according to the mercantile system of accounting;
(iii) a ledger;
[(iv) carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the person, and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him:
Provided that nothing in this clause shall apply in relation to sums not exceeding twenty-five rupees;]
(v) original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or, where such bills and receipts are not issued and the expenditure incurred does not exceed fifty rupees, payment vouchers prepared and signed by the person:
[Provided that the requirements as to the preparation and signing of payment vouchers shall not apply in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred by him.]

Explanation : In this rule,—

(a) “authorised representative” means a person who represents any other person, on payment of any fee or remuneration before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy;
(b) “cash book” means a record of all cash receipts and payments, kept and maintained from day-to-day and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a [month];
(c) “film artist” means any person engaged in his professional capacity in the production of a cinematograph film whether produced by him or by any other person, as:

(i) an actor;
(ii) a cameraman;
(iii) a director, including an assistant director;
(iv) a music director, including an assistant music director;
(v) an art director, including an assistant art director;
(vi) a dance director, including an assistant dance director;
(vii) an editor;
(viii) a singer;
(ix) a lyricist;
(x) a story writer;
(xi) a screen-play writer;
(xii) a dialogue writer; and
(xiii) a dress designer.
Management Notes

Miscellaneous provisions u/s 44

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Professionals in legal, medical, engineering, architecture, accountancy, technical consultancy and interior decoration have to maintain books of accounts. Sec 44AA casts an obligation on an individual or HUF carrying on business or profession, other than these professions, to maintain books of accounts and documents provided that the income and total sales, turnover or gross receipts, exceeds Rs 2.5 lakh and Rs 25 lakh, respectively.

Compulsory Audit: Sec. 44AB

Individuals and HUFs have to get their accounts audited if their total sales, turnover or gross receipts from their business exceed Rs 2 crore and gross receipts from his profession exceed Rs 50 lakh. Penalty leviable u/s 271B for failure to get accounts audited or to furnish a report of such audit is up to Rs 1.5 lakh.

Sec 271J provides for a penalty on an accountant, merchant banker or registered valuer who furnishes incorrect information in a report or certificate. The amount of penalty is Rs 10,000 for each such inaccurate report or certificate.

The section 44ADA is as follows:

44ADA. (1) Notwithstanding anything contained in sections 28 to 43C, in the case of an assessee, being a resident in India, who is engaged in a profession referred to in sub-section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”.

(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

(3) The written down value of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(4) Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (1) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

Eligible Profession: The presumptive taxation scheme under section 44ADA for estimating the income of an assessee:

  • who s engaged in any profession referred to in section 44AA(1 ) such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette; and
  • whose tota gross receipts does not exceed fifty akh rupees in a previous year

Profession referred to u/s 44AA(1): Every person carrying on:

  • Legal
  • Medical
  • Engineering
  • Architectural Profession
  • The Profession of Accountancy
  • Technical Consultancy
  • Interior Decoration
  • Any Other Profession as Is Notified by The Board In The Official Gazette

Other notified professions:

(a) The profession of authorized representative; and

(b) the profession of film artist (actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue writer and dress designer)

(c) the Profession of Company Secretary

(d) the Profession of Information Technology

Meaning of authorised representative:

Explanation to Rule 6F

Authorised representative means a person who represents any other person, on payment of any fee or remuneration before any Tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy.

Eligible Business-Financial consultancy

EXAMPLE : An Individual who is doing financial consultancy business and the service receiver while he is paying service charge, he is deducting TDS u/s 194 J. Whether he can offer income u/s 44ADA?

  1. No. Sec. 44ADA will be applicable only to the Notified Professions. It is a inclusive definition, it doesn‘t cover financial consultancy business, hence he can‘t offer income u/s 44ADA.

Presumptive rate of income: Presumptive rate of income would be a sum equal to 50% of the total gross receipts, or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assessee.

No further deduction would be allowed:  Section 44ADA (2): Under the scheme, the assessee will be deemed to have been allowed the deductions under section 30 to 38. Accordingly, no further deduction under those sections shall be allowed.

Written down value of the asset:  Section 44ADA(3):The written down value of any asset used for the purpose of the profession of the assessee will be deemed to have been calculated as if the assessee had claimed and had actually been allowed the deduction in respect of depreciation for the relevant assessment years.

Maintenance of books of accounts and audit:

A very interesting issue is that whether a professional who has opted presumptive system of taxation has to maintain books of account also. To resolve this issue firstly we have to see the provisions of section 44AA(1) of the Act given earlier in this book.

From the perusal of above section, it is clear that it is mandatory for the professional who is covered under Section 44ADA to maintain books of accounts even though he has opted for the presumptive taxation scheme. Although, the Memorandum to the Finance Bill, 2016 provides that an assessee opting for Section 44ADA would not be required to maintain books of account under Section 44AA(1), the same has not been brought out clearly in the Section 44AA. Section 44AA is silent in relation to the assessee who is covered by Section 44ADA. Moreover the provisions of Sec 44ADA overrides sec 28 to 43C and not sec 44AA of the Act. Hence, on combined reading of 44AA(1), 44AA(3) read with Rule 6F, the specified professionals would need to maintain books of account even if they opt for section 44ADA.

However, as per the FAQs on presumptive taxation issued by Income Tax Department provides that if assessee declares income u/s 44ADA, there is no need to maintain books of account. The FAQ issued is provided here

“If a person adopts the presumptive taxation scheme of section 44ADA, then he is required to maintain books of account as per section 44AA?

In case of a person engaged in a specified profession as referred in sections 44AA(1) and opts for presumptive taxation scheme of sections 44ADA, the provision of sections 44AA relating to maintenance of books of account will not apply. In other words, if a person opts for the provisions of sections 44ADA and declares income @50% of the gross receipts, then he is not required to maintain the books of account in respect of Specified profession.

From the above FAQ it can be concluded that person opting for sec 44ADA would not be required to maintain books of account. However, the FAQs do not have any legal backing and it may change in future.

Option to claim lower profits:Section 44ADA(4): An assessee mayclaim that his profits and gains from the aforesaid profession are lower than the profits and gains deemed to be his income under section 44ADA(1); and if such total income exceeds the maximum amount which is not chargeable to income-tax, he has to maintain books of account under section 44AA and get them audited and furnish a report of such audit under section 44AB.

Issues related to Sec 44ADA:

  • Applicability of Section 44ADA to a partner of firm receiving remuneration and/or interest from the firm

A very interesting is that whether the provisions of Section 44ADA shall be applicable to the remuneration and other receipts by a partner from a professional services firm? In this connection, it is to be noted that the Income Tax Act, 1961 vide Section 40(b) states that the firm is eligible to claim remuneration as deduction to the extent specified therein and such remuneration is deductible in hands of the firm. The balance amounts are subjected to tax as profits in the hands of the firm. In other words, the eligible remuneration is deductible in the hands of firm and taxable in hands of partners, the remainder (profit) is taxable in hands of the firm and exempted in the hands of partners u/s 10(2A).

Hence, in the hands of the partner, the following will be the impact:

  1. Remuneration which was allowed as deduction in firm will be taxable
  2. Profit which was taxed in the hands of the firm will be exempt.
Management Notes

Direct and Indirect Taxes

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Tax is a mandatory fee imposed upon individuals or corporations by the Central and the State Government to help build the economy of a country by meeting various public expenses. Taxes are broadly divided into two categories; Direct and Indirect taxes.

Some of the important direct taxes imposed in India are mentioned below:

  • Income Tax: It is imposed on an individual who falls under the different tax brackets based on their earning or revenue and they have to file an income tax return every year after which they will either need to pay the tax or be eligible for a tax refund.
  • Estate Tax: Also known as Inheritance tax, it is raised on an estate or the total value of money and property that an individual has left behind after their death.
  • Wealth Tax: Wealth tax is imposed on the value of the property that a person possesses.
  • Securities Transaction Tax: If you are involved in stock trading, each of your trade also has a small constituent known as the securities transaction tax. Irrespective of whether you made money on the trade or not, you will have to pay this tax. The broker collects this tax from you and passes on to the securities exchange, which then pays it to the government.
  • Capital Gains Tax: Every time you make capital gains, you will be required to pay capital gains tax. This capital gain could come from the sale of a property or from investments. Based on the capital gains and the duration for which you held the investment, you will be required to pay either LTCG (Long-Term Capital Gains) tax or STCG (Short-Term Capital Gains) tax.

Advantages

  • Social and economic balance: Based on every individual’s earnings and overall economic situation, the Government has well-defined tax slabs and exemptions in place so that the income inequalities can be balanced out.
  • It curbs inflation: The Government often increases the tax rate when there is a monetary inflation which in turn reduces the demand for goods and services and as a result of descending demand, the inflation is bound to condense.

Disadvantages of Direct Taxes

  • Considered a Burden: As taxpayers are required to pay direct taxes like income tax in a single lump sum every year, they are considered a burden. Moreover, even the documentation process is generally complex and time-consuming.
  • Evasion is Possible: While the government has made tax evasion very difficult now, there are still many fraudulent practices through which individuals and businesses can avoid or pay lower taxes than they should.
  • Restrains Investments: Due to the imposition of direct taxes like securities transaction tax and capital gains tax, a lot of people avoid investing. So, in a way, direct taxes restrain investments.

Indirect Tax

It is a tax levied by the Government on goods and services and not on the income, profit or revenue of an individual and it can be shifted from one taxpayer to another.

Earlier, an indirect tax meant paying more than the actual price of a product bought or a service acquired. And there was a myriad of indirect taxes imposed on taxpayers.

Used to earlier and still exist:

  • Customs Duty: It is an Import duty levied on goods coming from outside the country, ultimately paid for by consumers and retailers in India.
  • Central Excise Duty: This tax was payable by the manufacturers who would then shift the tax burden to retailers and wholesalers.
  • Service Tax: It was imposed on the gross or aggregate amount charged by the service provider on the recipient.
  • Sales Tax: This tax was paid by the retailer, who would then shifts the tax burden to customers by charging sales tax on goods and service.
  • Value Added Tax (VAT): It was collected on the value of goods or services that were added at each stage of their manufacture or distribution and then finally passed on to the customer.

GST as Indirect Tax

With the implementation of GST, we have already witnessed a number of positive changes in the fiscal domain of India. The various taxes that were mandatory earlier are now obsolete, thanks to this new reformed indirect tax. Not just that, GST is making sure the slogan “One Nation, One Tax, One Market” becomes the reality of our country and not just a dream.

That said, with the dawning of the ‘Goods & Services Tax (GST), the biggest relief so far is clearly the elimination of the ‘cascading effect of tax’ or the ‘tax on tax’ quandary.

Cascading effect of tax is a situation wherein the end-consumer of any goods or service has to bear the burden of the tax to be paid on the previously calculated tax and as a result would suffer an increased or inflated price.

Under the GST regime, however, the customer is exempted from the tax they would otherwise pay as a result of the cascading effect.

Benefits of Indirect Tax

  • Poor Contributes Too: It is essential for the country that every individual contributes towards its development.As the poor are often exempt from paying direct taxes, the indirect taxes ensure that even poor contribute towards nation-building.
  • Convenience: Unlike direct taxes which are generally paid in a lump-sum, indirect taxes like GST are paid in small amounts. When you purchase a product or service, a small amount of GST is already included in the price, and this makes its payment more convenient for the taxpayers.
  • The collection is Easy: If you want to know what is the difference between direct and indirect tax, one of the biggest of them is how they are paid. Unlike direct taxes, there are no documents or complex procedures involved in paying indirect taxes. You are required to pay the tax right when you purchase a product or service.
Management Notes

Definitions and Basic Concepts of Income Tax

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Tax is the compulsory financial charge levy by the government on income, commodity, services, activities or transaction. The word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the basic source of revenue for the government, which are utilized for the welfare of the people of the country through government policies, provisions and practices.

The Income Tax law in India consists of the following components;

  • Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in India.
  • Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks after the administration of Direct Tax. The CBDT is empowered to make rules for carrying out the purpose of this Act.
  • Finance Act: Every year Finance Minister of Government of India presents the budget to the parliament. Once the finance bill is approved by the parliament and get the clearance from President of India, it became the Finance Act.
  • Circulars and Notifications: Sometimes the provisions of an act may need clarification and that clarification usually in a form of circulars and notifications which has been issued by the CBDT from time to time. It includes clarifying the doubts regarding the scope and meaning of the provisions.

Every statute gains sanction from the law of land, i.e.,the Constitution of India. Similarly, the government is authorised by the Constitution to collect the taxes. According to Article 265 of the Constitution of India, no tax shall be levied or collected except by authority of law.[1] Thus, the tax levied and collected must be within the competency of authority authorised by the legislature.

Entry 82 of List I of Seventh Schedule of the Constitution of India confer power on Parliament to levy taxes on income other than agricultural income. Thus, Income Tax is under the Union list and henceforth Central Government is authorised and responsible for the collection of income tax.

The Central Government enjoys the power to collect taxes on income except for the tax on agricultural income, which is being enjoyed by the State Government. Entry 46 of List II of Seventh Schedule of the Constitution of India provides that the State Government has the power to collect taxes on agricultural income.

“Income Tax is levied on the total income of the previous year of every person”. To understand the basic concept.It is very important to know the various other concepts.

Concept of Income

In common parlance, Income is known as a regular periodic return to a person from his activities. However, the Income has broader classified in Income Tax law. The Income Tax Act, even take consideration of income which has not arisen regularly and periodically. For instance, winning from lotteries, crossword puzzles, income from winning of shows is also subject to tax as per income tax.

The word “Person” is a very wide term and embraces in itself the following:

  • Individual: It refers to a natural human being whether Male or Female, Minor or Major.
  • Hindu Undivided Family (HUF): It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “Karta” and its member are called ‘Coparceners’.
  • Company: It is an artificial person registered under Indian Companies Act 1956 or any other Law.
  • Firm: It is an entity which comes into existence as a result of partnership agreement. The Income Tax accepts only these entities as Firms which are accessed as Firms under Section 184 of the Act.
  • Association of Persons (AOP) or Body of Individuals (BOI): Co-operative societies, MARKFED, NAFED, etc are the example of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and individuals as its members. A Body of Individual ( B.O.I.) cannot have non-individuals as its members. Only natural human being can be members of a Body of Individuals.
  • Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.
  • Artificial Judicial Person: Statutory Corporations like Life Insurance Corporation, a University etc. are called Artificial Judicial Persons.

Purpose of Taxation

  • The money spent on the development of roads, schools, and hospitals, market regulations or legal systems, etc. is raised by the revenue generated by the collection of taxes
  • Redistribution of resources by the richer section to the poorer section of the society.
  • Taxes are levied on certain products to eliminate externalities such as the taxes on tobacco to discourage smoking.

List 1

  • Entry 82: Tax on Income other than the agriculture income.
  • Entry 83: Duties of customs including the export duties.
  • Entry 84: Duties of excise on tobacco and other goods manufactured or produced in India except for alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.
  • Entry 85: Corporation tax
  • Entry 92A: Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of interstate trade or commerce.
  • Entry 92B: Taxes on consignment of the goods where such consignment takes place during Inter-State trade or commerce.
  • Entry 92C: Taxes on services
  • Entry 97: Any other matter which is not included in List II, List III and any tax not mentioned in List II or List III.

List 2

  • Entry 46: Taxes on agricultural income.
  • Entry 51: Excise duty on all alcoholic liquors, opium and narcotics.
  • Entry 52: Tax on entry of the goods into a local area for consumption, use or sale therein (usually termed as Octroi or Entry Tax).
  • Entry 54: Tax on sale or purchase of goods other than newspapers except for tax on interstate sale or purchase.
  • Entry 55: Tax on advertisements except advertisements in newspapers.
  • Entry 56: Tax on goods and passengers that are carried by road transport or inland waterways.
  • Entry 59: Tax on professionals, trades, callings, and employment.
Management Notes

Incidence of Tax

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Tax incidence (or incidence of tax) is an economic term for understanding the division of a tax burden between stakeholders, such as buyers and sellers or producers and consumers. Tax incidence can also be related to the price elasticity of supply and demand. When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.

The tax incidence depicts the distribution of the tax obligations, which must be covered by the buyer and seller. The level at which each party participates in covering the obligation shifts based on the associated price elasticity of the product or service in question as well as how the product or service is currently affected by the principles of supply and demand.

Tax incidence reveals which group consumers or producers will pay the price of a new tax. For example, the demand for prescription drugs is relatively inelastic. Despite changes in cost, its market will remain relatively constant.

  • Tax incidence is the manner in which the tax burden is divided between buyers and sellers.
  • The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.
  • Tax revenue is larger the more inelastic the demand and supply are.

Price Elasticity and Tax Incidence

Price elasticity is a representation of how buyer activity changes in response to movements in the price of a good or service. In situations where the buyer is likely to continue purchasing a good or service regardless of a price change, the demand is said to be inelastic. When the price of the good or service profoundly impacts the level of demand, the demand is considered highly elastic.

Examples of inelastic goods or services can include gasoline and prescription medicines. The level of consumption across the economy remains steady with price changes. Elastic products are those whose demand is significantly affected by price. This group of products includes luxury goods, houses, and clothing.

The formula for determining the consumer’s tax burden with “E” representing elasticity is as follows:

  • E (supply) / (E (demand)) + E (supply)

The formula for determining the producer or supplier’s tax burden with “E” representing elasticity is as follows:

E (demand) / (E (demand) + E (supply))

Incidence of Tax

The incidence of tax refers to the ultimate economic burden or impact of a tax, determining who bears the actual cost of the tax. In any tax system, there are two main concepts related to tax incidence:

  1. Legal Incidence:

Legal incidence refers to the entity or individual legally responsible for remitting the tax to the government. This is the party identified by tax laws as being liable to pay the tax.

  1. Economic Incidence:

Economic incidence refers to the actual burden of the tax, indicating who ultimately bears the cost of the tax in economic terms. This may or may not be the same as the legally designated taxpayer.

Tax Incidence Examples:

  1. Direct Taxes:
    • Legal Incidence: For direct taxes like income tax, the legal incidence usually falls on individuals or entities with specific types of income.
    • Economic Incidence: The economic incidence depends on factors like the elasticity of demand for the taxed goods or services. For example, if a business faces a highly elastic demand for its products, it may pass on the tax burden to consumers in the form of higher prices, thus shifting the economic incidence to consumers.
  2. Indirect Taxes:
    • Legal Incidence: For indirect taxes like the Goods and Services Tax (GST), the legal incidence is on the businesses involved in the production and distribution of goods and services.
    • Economic Incidence: The economic incidence can vary. In some cases, businesses may pass on the tax burden to consumers through higher prices. However, businesses may absorb the tax if the market conditions are competitive and demand is sensitive to price changes.
  3. Corporate Taxes:
    • Legal Incidence: Corporations are legally responsible for paying corporate income taxes.
    • Economic Incidence: The economic incidence can be distributed among various stakeholders, including shareholders (in the form of reduced dividends or stock value), employees (in the form of lower wages), and consumers (in the form of higher prices).

Factors Influencing Tax Incidence:

  • Elasticity of Demand:

In markets with inelastic demand, businesses are more likely to pass on the tax burden to consumers through higher prices. In contrast, in markets with elastic demand, businesses may absorb the tax to remain competitive.

  • Elasticity of Supply:

In markets where the supply of goods or services is elastic, producers can more easily adjust production levels in response to changes in taxes without significant impact on prices.

  • Market Structure:

The degree of competition in a market influences the ability of businesses to pass on the tax burden. In competitive markets, businesses may have limited pricing power, affecting their ability to shift the tax burden to consumers.

  • Ability to Substitute:

If consumers can easily substitute one product for another, businesses may find it challenging to pass on the tax burden, as consumers can switch to alternatives with lower prices.

  • Bargaining Power:

The relative bargaining power of different economic agents, such as employers and employees or buyers and sellers, can influence how the economic burden of taxes is distributed.

Management Notes

Advertising Budget and ROI tips

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One of the most important components of a marketing campaign is to evaluate its performance and impact and profit so that it can be determined whether or not your marketing efforts are actually helping the company. The insights gained through the process can be used to drive future, data-driven strategies for smarter decision-making.

Marketing ROI is the practice of attributing profit and revenue growth to the impact of marketing initiatives. By calculating marketing ROI, organizations can measure the degree to which marketing efforts either holistically, or on a campaign-basis, contribute to revenue growth. Typically, marketing ROI is used to justify marketing spend and budget allocation for ongoing and future campaigns and initiatives.

Distribute Marketing Budgets

Across online and offline channels, there’s a myriad of possible marketing mix combinations. However, any combination of campaign initiatives require funding. That’s why understanding which online and offline efforts drive the most revenue is a must for properly distributing the marketing budget.

Measure Campaign Success and Establish Baselines

A crucial part of any successful marketing team is the ability to measure campaign success and establish baselines that can serve as a reference for future efforts. With this in mind, accurately measuring ROI helps marketers do both. By understanding the impact of individual campaigns on overall revenue growth, marketers can better identify the right mix of offline and online campaign efforts. Moreover, measuring ROI consistently allows marketers to establish baselines to quickly gauge their success and adjust efforts in order to maximize impact.

Competitive Analysis

Tracking the marketing ROI of competitors allows marketers to accurately understand how their organization is performing within their specific industry. For example, marketers tracking publicly available financial data can estimate the ROI of competitors and adjust baselines to reflect these estimates helping to keep efforts consistently competitive.

How to Calculate Marketing ROI Using a Formula

While there are several different ways to calculate marketing ROI, the core formula used to understand marketing impact at a high-level is relatively straightforward:

Marketing ROI = (Sales Growth – Marketing Cost) / Marketing Cost

It’s important to note, however, that this formula makes the assumption that all sales growth is tied to marketing efforts. In order to generate a more realistic view of marketing impact and ROI, marketers should account for organic sales.

Marketing ROI =(Sales Growth – Organic Sales Growth – Marketing Cost) / Marketing Cost

When leveraging marketing ROI formulas, it’s also important to understand the total ROI marketing efforts have generated. Be aware that definitions for an actionable “return” can vary based on the marketing team’s strategy and campaign efforts, as well as general overhead related to campaign implementation.

  • Total Revenue: By looking at the total revenue generated from a particular campaign, marketers can gain a clear holistic overview of their efforts. Accounting for total revenue when measuring marketing ROI is ideal for strategic media planning, budget allocation and overall marketing impact.
  • Gross Profit: Tying in gross profit helps marketers understand the total revenue marketing efforts generate in relation to the cost of production or delivery of goods and services. To do this, marketers should add the following to their marketing ROI formula: = (Total revenue – cost of goods to deliver a product).
  • Net Profit: Diving deeper, marketers can calculate the impact of their marketing efforts toward net profit by adding the following to their formula: = (Gross profit – additional expenses).

It’s important to consistently define what profit/expenditures and overall ROI your team will account for across marketing ROI measurement efforts. Consider including the following:

  • Overhead and internal expenses
  • Agency fees
  • Media buys
  • Creative

Marketers can also calculate ROI through customer lifetime value (CLV), which sheds light on the value of each individual customer relationship with a brand. This formula helps assess long-term ROI across the consumer’s lifecycle. To do this, marketers can use the following formula:

Customer Lifetime Value = (Retention Rate)/ (1 + Discount Rate/ Retention Rate)

Branded

Some Google Ads users are hesitant to bid on branded terms because it’s unlikely that a searcher who converts after clicking a branded ad is a true “first touch.” Conversions have to be couched in the fact that those searching for your company name may very well have already visited the site. That doesn’t mean branded terms aren’t valuable in terms of ROI. Your Quality Score will be maxed out. Volume / competition probably aren’t high compared to top of funnel terms.

Top of funnel

These are your research-based terms. Since ROI will be lower here than in branded or bottom of funnel campaigns, you’re going to want to keep a close eye on what’s working and what isn’t. Flexibility is key here: if a top of funnel term is leading to conversions, then go for it. On the other hand, don’t just spend money to spend money: odds are, variations of the keywords you’re bidding on here exist that convert better for less. Fish those out of your search queries and watch ROI skyrocket.

Competitor

Bidding on competitor terms can be a disaster in terms of ROI. The terms are expensive. Your copy is probably irrelevant, comparatively speaking. There is, however, a hack that lets you improve (or in some cases, simply create) ROI while bidding on competitor terms. To maximize your return on competitor keywords, use RLSA. But instead of increasing bids, use your remarketing lists to ensure you’re only bidding on competitor terms when prospects who have visited your site are searching for them (you can do this by selecting “target and bid” instead of the default “bid only” option). This indicates that they’re shopping around: present an offer that cannot be refused and these oft useless campaigns can pay major dividends.

Management Notes

Advertising Tracking

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Ad tracking, also known as post-testing or ad effectiveness tracking, is in-market research that monitors a brand’s performance including brand and advertising awareness, product trial and usage, and attitudes about the brand versus their competition.

Depending on the speed of the purchase cycle in the category, tracking can be done continuously (a few interviews every week) or it can be “pulsed,” with interviews conducted in widely spaced waves (ex. every three or six months). Interviews can either be conducted with separate, matched samples of consumers, or with a single (longitudinal) panel that is interviewed over time.

Since the researcher has information on when the ads launched, the length of each advertising flight, the money spent, and when the interviews were conducted, the results of ad tracking can provide information on the effects of advertising.

Purpose

The purpose of ad tracking is generally to provide a measure of the combined effect of the media weight or spending level, the effectiveness of the media buy or targeting, and the quality of the advertising executions or creative.

Advertisers use the results of ad tracking to estimate the return on investment (ROI) of advertising, and to refine advertising plans. Sometimes, tracking data are used to provide inputs to Marketing Mix Models which marketing science statisticians build to estimate the role of advertising, as compared to pricing, distribution and other marketplace variables on sales of the brand.

Methodology

Today, most ad tracking studies are conducted via the Internet. Some ad tracking studies are conducted continuously and others are conducted at specific points in time (typically before the advertising appears in market, and then again after the advertising has been running for some period of time). The two approaches use different types of analyses, although both start by measuring advertising awareness. Typically, the respondent is either shown a brief portion of a commercial or a few memorable still images from the TV ad. Other media typically are cued using either branded or de-branded visual of the ad. Then, respondents answer three significant questions.

  • Do you recognize this ad? (recognition measure)
  • Please type in the sponsor of this ad. (unaided awareness measure)
  • Please choose from the following list, the sponsor of this ad. (aided awareness measure)

The continuous tracking design analyzes advertising awareness over time, in relation to ad spending; separately, this design tracks brand awareness, and then develops indices of effectiveness based on the strength of the correlations between ad spending and brand awareness.

The most popular alternate approach to the continuous tracking design is the Communicants System longitudinal design, in which the same people are interviewed at two points in time. Changes in brand measures (for example, brand purchasing and future purchase intentions) exhibited among those who have seen the advertising are compared to the changes in brand measures that occurred among those unaware of advertising. By means of this method, the researchers can isolate those marketplace changes that were produced by advertising versus those that would have occurred without advertising.

Internet tracking

There are several different tools to track online ads: banner ads, ppc ads, pop-up ads, and other types. Several online advertising companies such as Google offer their own ad tracking service (Google Analytics) in order to effectively use their service to generate a positive ROI. Third-party ad tracking services are commonly used by affiliate marketers. Affiliate marketers are frequently unable to have access to the order page and therefore are unable to use a 3rd-party tool. Many different companies have created tools to effectively track their commissions in order to optimize their profit potential. The information provided will show the marketer which advertising methods are generating income and which are not and allows him to effectively allocate his budget.

Why use conversion tracking

  • See which keywords, ads, ad groups, and campaigns are best at driving valuable customer activity.
  • Understand your return on investment (ROI) and make better informed decisions about your ad spend.
  • Use Smart Bidding strategies (such as Maximize Conversions, target CPA, and target ROAS) that automatically optimize your campaigns according to your business goals.
  • See how many customers may be interacting with your ads on one device or browser and converting on another. You can view cross-device, cross-browser, and other conversion data in your “All conversions” reporting column.

Website actions: Purchases, sign-ups, and other actions that customers complete on your website.

Phone calls: Calls directly from your ads, calls to a phone number on your website, and clicks on a phone number on your mobile website.

App installs and in-app actions: Installs of your Android or iOS mobile apps, and purchases or other activity within those apps.

Import: Customer activity that begins online but finishes offline, such as when a customer clicks an ad and submits a contact form online, and later signs a contract in your office.

Local actions: Actions that are counted whenever people interact with an ad that’s specific to a physical location or store.

The conversion tracking process works a little differently for each conversion source, but for each type besides offline conversions, it tends to fall into one of these categories:

  • You add a conversion tracking tag, or code snippet, to your website or mobile app code. When a customer clicks on your ad from Google Search or selected Google Display Network sites, or when they view your video ad, a temporary cookie is placed on their computer or mobile device. When they complete the action you defined, our system recognizes the cookie (through the code snippet you added), and we record a conversion.
  • Some kinds of conversion tracking don’t require a tag. For example, to track phone calls from call extensions or call-only ads, you use a Google forwarding number to track when the call came from one of your ads, and to track details like call duration, call start and end time, and caller area code. Also, app downloads and in-app purchases from Google Play, and local actions will automatically be recorded as conversions, and no tracking code is needed.

Once you’ve set up conversion tracking, you can see data on conversions for your campaigns, ad groups, ads, and keywords. Viewing this data in your reports can help you understand how your advertising helps you achieve important goals for your business.

Security and privacy for website tracking

Google’s security standards are strict. Google Ads only collects data on pages where you have deployed the associated tags.

Please ensure you’re providing users with clear and comprehensive information about the data you collect on your websites, and getting consent for that collection where legally required.

Management Notes

Getting started with Google Adwords

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Learn a few basic terms

  • Keywords: These are the words or phrases that people type into Google Search, which trigger your ad to appear. When setting up an ad campaign, you’ll pick a list of keywords that you think people might search for when they want what you have to offer (and don’t worry: we can help).
  • Bid: This is the maximum amount you’re willing to pay when someone clicks on your ad. (Since, with Google Ads, you don’t pay to show up only when someone clicks on your ad to visit your site or call you.)
  • Quality Score: This metric tells you how relevant your keywords are to your ad and to your landing page (i.e. the webpage where people will be taken when they click your ad). A good Quality Score can lower your bid costs and improve your ad rank in the search results.
  • Ad Rank: This metric helps determine where your ad will show up, relative to other ads, when it’s triggered to appear on Google. Your rank is determined using your bid, your Quality Score, and other factors.
  • CPC (cost-per-click): The actual amount you pay when someone clicks on your ad. (You don’t necessarily pay your entire bid price for every click that just sets up a range of possible costs-per-click you might pay.)
  • Conversion: A conversion takes place when someone who has clicked your ad goes on to take another action you’ve designated as important like making a purchase, signing up for a newsletter, or calling you.

Organize your account

How do you set your account up for success from the beginning? Start by breaking down your products or services into categories, and basing your account structure on those. (One good option is to mirror the structure you already use on your website.)

There are two levels of organization within a Google Ads account: campaigns (the higher level) and ad groups (the lower level you can have multiple ad groups in each campaign). Think about campaigns as representing larger categories in your business, and ad groups as representing smaller, more specific sets of products or services. For instance, if you run a craft supply store, you might create these campaigns and ad groups:

Campaign 1: Knitting and sewing

  • Ad Group 1: Yarn
  • Ad Group 2: Needles and hoops
  • Ad Group 3: Fabric and embroidery thread

Campaign 2: Kid’s crafts

  • Ad Group 1: Paint and markers
  • Ad Group 2: Glitter and glue
  • Ad Group 3: Craft kits

Creating separate campaigns, ad groups, ads, and keyword lists for your products helps keep your ads relevant, making sure that someone who’s looking for “glitter glue,” for example, doesn’t accidentally see your ad for “embroidery thread” and think you don’t have what they need.

The more focused and specific your ads are, the more people you can reach who are interested in exactly what you have to offer.

Set your budget

With Google Ads, you control how much you spend using two different settings: your daily budget and your bids.

Your budget is the amount you want to spend on each campaign per day. Your bid is the amount you’re willing to spend on a keyword if someone searches for that term and then clicks your ad.

When you’re first starting out, it can be a good idea to spread your overall budget (i.e. the amount you want to pay for your whole account) evenly across your campaigns, until you get an idea which one work best for your business. But in general, you should set different campaign budgets and bid amounts based on your business goals. For example, if you want to draw shoppers to your “kids crafts” products one month, you should consider setting a higher budget for that campaign, and lowering the budget for another, less important one. You can change your budget and bids any time, so if something isn’t working, you can adjust to meet your needs.

Pick your keywords

The goal when picking keywords is to choose terms that you think people will search for when they’re looking online for what you offer. In addition, you want your keywords to be as relevant as possible to the ad they trigger and to the landing page people will arrive at if they click that ad.

To help you get started, Google Ads comes with a free tool called the Keyword Planner, which can generate a sample list of keywords for your campaigns. (We recommend reviewing the list of suggestions and only using the ones that make sense for you.) The Keyword Planner can also help you estimate how much to bid on a particular keyword so your ad shows up in search results this can give you an idea about whether certain keywords are too expensive for you to bid on, and which will fit within your budget. In general, the more competitive a keyword is, the more it will cost to bid on. When you’re first starting out, you may want to avoid high-competition keywords, so you don’t spend your whole budget on just a few clicks. Sticking with low-to-medium cost keywords can still get you a lot of exposure, and also help you test out how your campaigns are working.

Set your keyword match types

“Keyword match type” is a setting in Google Ads that lets you further refine when your ad will show up on Google. There are five options:

Broad Match:

The “broad match” setting shows your ad for searches that contain your keywords in any order, and for related terms. This option shows your ad in the broadest variety of searches, and is the default setting for all campaigns.

Broad Match Modifier:

This setting allows you to specify that certain words in your broad-match keyword must show up in a user’s search to trigger your ad. So, if your keyword is “high fiber wool yarn” and you wanted to make sure “wool” and “yarn” were always present in a search, you could ensure that by adding a plus sign (+) before those words. So, your broad match modifier keyword would be: high fiber +wool +yarn.

Phrase Match:

This option shows your ad for searches that contain your exact keyword, or for searches that contain your exact keyword plus words before or after it. (I.e. if your keyword is “wool yarn” you might also show up for “fine wool yarn” or “wool yarn for sale near me.”) To choose this option, you should add quotation marks around any keywords, i.e. “wool yarn”.

Exact Match:

When you choose exact match, your ad will only show if someone searches for the exact word or phrase you choose. For this option, put brackets around your keyword, i.e.: [wool yarn].

Negative Match:

This match option allows you to exclude undesirable words or phrases from triggering your ad, weeding out irrelevant traffic. For instance, if you only sell high-end yarn, you might want to exclude words like “bargain” or “cheap.” You can do so by putting a minus sign in front of the words you don’t want to show up for, i.e.: -cheap, -bargain.

Set your landing pages

Your landing page is where potential customers arrive after clicking on your ad. Choosing a page that’s relevant to your ad and keywords can help people find what they’re looking for more quickly: so, if your ad is promoting a sale on yarn, choose a landing page where that yarn is prominently featured, instead of just sending people to your website’s home page.

Decide which devices to show up on

Do your ideal customers search on a desktop, mobile device, or both? Are you more interested in reaching shoppers when they’re out and about, or people who want to make an immediate online purchase? As you set up your Google Ads account, consider which types of customers you want to connect with (and more importantly, the types of devices those customers use), so you can reach them. For instance, if you run a car repair shop and want to attract customers when they’re nearby and needing help, consider showing your ads only on mobile devices.

Write your ads

Your ad is the first impression many people will have of your business, so make sure it communicates that you have what they need. This is easiest when the ad actually contains the keywords people search for — which you can accomplish by breaking your campaign out into clear ad groups, and writing unique ads for each (a yarn-promoting ad for your yarn keywords, and a craft-promoting ad for your craft supplies, for example). This will make your ads more relevant to potential customers, and also possibly increase your Quality Score.

It’s also a good idea to include a “call to action” in your ad: a clear, concise message that tells the reader what you’d like them to do after seeing your ad. Phrases like “shop now” or “learn more” can entice people to click on your ad, for example.

Finally, before you post your ad, look over it one last time to check for spelling or grammar errors.

Connect your account to Google Analytics

Google Analytics is a free way to get even more insights into how people interact with your ads and website. You don’t have to use Analytics to use Google Ads, though, so feel free to skip to the next step if you prefer.

While Google Ads can tell you how many people click on your ads, integrating Google Ads and Analytics lets you keep an eye on what those people do once they reach your website. For example, if people arrive at your site but then immediately click away, your ad might not be reaching the right people after all  or you might be taking them to to wrong area of your site. These insights can help you better organize your ads, and possibly get more out of your marketing budget.

 Hit go and check back in

Good work! You’re ready to activate your campaigns and see how they perform. Remember to check back in frequently to keep an eye on which ads and keywords are bringing you the most clicks and conversions. Over time, you should start to see which strategies are helping you meet your goals, and which still need tweaking.

Source: https://ads.google.com/home/resources/how-to-setup-googleads-a-checklist/

Management Notes

Key Google Adwords Strategies

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Types of research to do:

  • Keyword Research: Use keyword tools to find the most relevant keywords people are typing into the search engines to find your product/service/company. Plan to spend at least a few hours on this…it’s the foundation of your campaign.
  • Competitive Research: Study the companies bidding on these keywords in AdWords. See who consistently is ranking at or near the top of the rankings. Note their ad copy and offers. Visit their websites. Sign up for their mailing lists. Purchase their products.
  • Research Your Audience: Where are customers buying and reviewing products/services/businesses like yours online? Read their reviews. What do they love/hate about your competition? What are the deep needs/desires they’re looking to fulfill? What emotions are they expressing? While researching them, look for great quotes you can use for ad copy.

Ad copy should:

  • Be highly relevant to the keywords they’re being displayed for (including the exact terms when possible)
  • Stand out from the competition with different offers, benefits, etc.
  • Reflect the messaging/offer on your landing page(s).
Management Notes

Pay-Per-Click Advertising

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Pay-per-click (PPC) is an internet advertising model used to drive traffic to websites, in which an advertiser pays a publisher (typically a search engine, website owner, or a network of websites) when the ad is clicked.

Pay-per-click is commonly associated with first-tier search engines (such as Google Ads, Amazon Advertising, and Microsoft Advertising formerly Bing Ads). With search engines, advertisers typically bid on keyword phrases relevant to their target market and pay when ads (text-based search ads or shopping ads that are a combination of images and text) are clicked. In contrast, content sites commonly charge a fixed price per click rather than use a bidding system. PPC display advertisements, also known as banner ads, are shown on web sites with related content that have agreed to show ads and are typically not pay-per-click advertising. Social networks such as Facebook, LinkedIn, Pinterest and Twitter have also adopted pay-per-click as one of their advertising models. The amount advertisers pay depends on the publisher and is usually driven by two major factors: quality of the ad, and the maximum bid the advertiser is willing to pay per click. The higher the quality of the ad, the lower the cost per click is charged and vice versa.

However, websites can offer PPC ads. Websites that utilize PPC ads will display an advertisement when a keyword query matches an advertiser’s keyword list that has been added in different ad groups, or when a content site displays relevant content. Such advertisements are called sponsored links or sponsored ads, and appear adjacent to, above, or beneath organic results on search engine results pages, or anywhere a web developer chooses on a content site.

The PPC advertising model is open to abuse through click fraud, although Google and others have implemented automated systems to guard against abusive clicks by competitors or corrupt web developers.

PPC stands for pay-per-click, a model of internet marketing in which advertisers pay a fee each time one of their ads is clicked. Essentially, it’s a way of buying visits to your site, rather than attempting to “earn” those visits organically.

Search engine advertising is one of the most popular forms of PPC. It allows advertisers to bid for ad placement in a search engine’s sponsored links when someone searches on a keyword that is related to their business offering. For example, if we bid on the keyword “PPC software,” our ad might show up in the very top spot on the Google results page.

Every time our ad is clicked, sending a visitor to our website, we have to pay the search engine a small fee. When PPC is working correctly, the fee is trivial, because the visit is worth more than what you pay for it. In other words, if we pay $3 for a click, but the click results in a $300 sale, then we’ve made a hefty profit.

A lot goes into building a winning PPC campaign from researching and selecting the right keywords, to organizing those keywords into well-organized campaigns and ad groups, to setting up PPC landing pages that are optimized for conversions. Search engines reward advertisers who can create relevant, intelligently targeted pay-per-click campaigns by charging them less for ad clicks. If your ads and landing pages are useful and satisfying to users, Google charges you less per click, leading to higher profits for your business. So, if you want to start using PPC, it’s important to learn how to do it right.

PPC is an online advertising model in which advertisers pay each time a user clicks on one of their online ads.

There are different types of PPC ads, but one of the most common types is the paid search ad. These ads appear when people search for things online using a search engine like Google especially when they are performing commercial searches, meaning that they’re looking for something to buy. This could be anything from a mobile search (someone looking for “pizza near me” on their phone) to a local service search (someone looking for a dentist or a plumber in their area) to someone shopping for a gift (“Mother’s Day flowers”) or a high-end item like enterprise software. All of these searches trigger pay-per-click ads.

In pay-per-click advertising, businesses running ads are only charged when a user actually clicks on their ad, hence the name “pay-per-click.”

Other forms of PPC advertising include display advertising (typically, serving banner ads) and remarketing.

Purpose

Pay-per-click, along with cost per impression (CPM) and cost per order, are used to assess the cost-effectiveness and profitability of internet marketing and drive the cost of running advertisement campaign as low as possible while retaining set goals. In Cost Per Thousand Impressions (CPM), the advertiser only pays for every 1000 impressions of the ad. Pay-per-click (PPC) has an advantage over cost per impression in that it conveys information about how effective the advertising was. Clicks are a way to measure attention and interest; if the main purpose of an ad is to generate a click, or more specifically drive traffic to a destination, then pay-per-click is the preferred metric. The quality and placement of the advertisement will affect click through rates and the resulting total pay-per-click cost.

Flat-rate PPC

In the flat-rate model, the advertiser and publisher agree upon a fixed amount that will be paid for each click. In many cases, the publisher has a rate card that lists the pay-per-click (PPC) within different areas of their website or network. These various amounts are often related to the content on pages, with content that generally attracts more valuable visitors having a higher PPC than content that attracts less valuable visitors. However, in many cases, advertisers can negotiate lower rates, especially when committing to a long-term or high-value contract.

The flat-rate model is particularly common to comparison shopping engines, which typically publish rate cards. However, these rates are sometimes minimal, and advertisers can pay more for greater visibility. These sites are usually neatly compartmentalized into product or service categories, allowing a high degree of targeting by advertisers. In many cases, the entire core content of these sites is paid ads.

Bid-based PPC

The advertiser signs a contract that allows them to compete against other advertisers in a private auction hosted by a publisher or, more commonly, an advertising network. Each advertiser informs the host of the maximum amount that he or she is willing to pay for a given ad spot (often based on a keyword), usually using online tools to do so. The auction plays out in an automated fashion every time a visitor triggers the ad spot.

When the ad spot is part of a search engine results page (SERP), the automated auction takes place whenever a search for the keyword that is being bid upon occurs. All bids for the keyword that target the searcher’s Geo-location, the day and time of the search, etc. are then compared and the winner determined. In situations where there are multiple ad spots, a common occurrence on SERPs, there can be multiple winners whose positions on the page are influenced by the amount each has bid. The bid and Quality Score are used to give each advertiser’s advert an ad rank. The ad with the highest ad rank shows up first. The predominant three match types for both Google and Bing are Broad, Exact and Phrase Match. Google Ads and Bing Ads also offer the Broad Match Modifier type which differs from broad match in that the keyword must contain the actual keyword terms in any order and doesn’t include relevant variations of the terms.

As its name implies, the Ad Auction is a bidding system. This means that advertisers must bid on the terms they want to “trigger,” or display, their ads. These terms are known as keywords.

Say, for example, that your business specializes in camping equipment. A user wanting to purchase a new tent, sleeping bag, or portable stove might enter the keyword “camping equipment” into a search engine to find retailers offering these items.

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