Is Smart Pricing Killing Your AdSense Earnings?

When Google first started, you basically just earned a certain percentage of whatever the AdWords advertiser was paying per click.
It was pretty simple. If the advertiser paid $1.00 per click and if you as a publisher were earnings 50% of that, you made $0.50. Easy.
Google started to realize, though, that all clicks were not created equal. Clicks from some sites were more valuable than others, at least that's what they figured.
So they came up with an alogorithm, a mathmatical equation for determining how valuable your AdSense account, sites and pages are, and use that equation to determine what percentage you get per click.
Speculation Galore
Smart Pricing has triggered a HUGE amount of speculation on the part of AdSense publishers. Google is notorious for having very little to say about the way its algorithms work. Their thinking is that the less people know about it, the less chance they are going to be able to cheat the system.
This lack of communication has caused all kinds of speculation about how Smart Pricing works, what it looks for, etc. Nobody knows exactly how it works, but I've got hundreds of websites, and track everything. I've learned a few things about what Smart Pricing seems to like and what it seems to not like.
What We Know For Sure
The one piece of information that Google has given out about Smart Pricing is that it takes into account how well the visitors from your site who click on the ads convert into customers for the advertiser.
In a perfect system this would be all of the information that Google used. If your clicks converted well, you would be well paid. If they converted badly, you would be paid less per click.
However, AdWords advertisers are not required to reveal their conversion data to Google. Google gives them that ability, but a lot of advertisers do not use it, so Google has to try and "guess" at whether or not your clicks are converting for those advertisers.
What Smart Pricing Seems to Like
Smart pricing definitely loves themed websites. If your websites is devoted to Widgets, and only Widgets, Smart Pricing tends to reward your clicks better. The more narrow your targetting, the better.
However, Smart Pricing does not seem to penalize sites that have a group of related topics. So, for example, if your site is themed around Widgets but has content related to Red Widgets, Blue Widgets, Green Widgets, Building Widgets and Used Widgets, Smart Pricing seems to favor that.
If you have themed topics, it's appears to be best to seperate them into subdomains or subdirectories. So don't put your articles on Red and Green widgets where they can be found like so:
http://www.mywidgets.com/redwidgets.html
http://www.mywidgets.com/greenwidgets.html
Put them like this:
http://www.mywidgets.com/redwidgets/
http://www.mywidgets.com/greenwidgets/
Or better still:
http://redwidgets.mywidgets.com/
http://greenwidgets.mywidgets.com/
In line with theming, having a domain name with your keywords in it also appears to be favored by Smart Pricing. So the "mywidgets.com" example used above is a good one. Having a domain like "www.someunrelatedsite.com" seems to draw penalties from Smart Pricing.
So make your domain name match your theme, and split up your content into related topics in different subdirectories or subdomains.
What Smart Pricing Seems To Hate
The opposite of what Smart Pricing likes, it hates. Having too many topics on the same site really seems to draw penalties.
Having a domain name that has nothing to do with the topic of your site seems to draw penalties.
And, as discussed before, if your site does not convert well, you'll get hit with Smart Pricing penalties. You can avoid a bad conversion rate by only focusing on quality traffic to your site.
Get traffic from Search Engines and links from sites about topics related to yours. Avoid cheap traffic brokers like the plague! They send lousy traffic (most of which is fake "bot-generated" traffic anyway and won't earn you a dime).
You might be tempted to try it out, but beware: Smart Pricing appears to calculate your "value" once a week or so. That means that if you goof, for the next week you'll get lousy paying clicks. It's best to get it right from the get-go and avoid those mistakes.
Is Smart Pricing Fair To Publishers?
That's an interesting question that I've read debated a lot. Some say that it shouldn't be up to the publisher to convert the traffic, it should be up to the vendor. And if the vendor's site converts badly in general, the publisher will get penalized. Whether that's true or not I don't know–only Google knows.
Other's say Smart Pricing was needed to help advertisers maintain a good ROI (return on investment). They say that "bad" traffic that doesn't convert well should not cost as much as "good" traffic that does.
Regardless of what anybody thinks about it, or whether it works or not, Google has implemented Smart Pricing. So you've got to know how to work with it to maximize your earnings.
Following the advice outlined above from the start will help you to keep your click values high.