‘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.
How smart pricing works
We are constantly analyzing data across our network, and if our data shows that a click is less likely to turn into business results (e.g. online sale, registration, phone call, newsletter sign-up), we may reduce the price you pay for that click. You may notice a reduction in the cost of clicks from content sites.
We take into account many factors such as what keywords or concepts triggered the ad, as well as the type of site on which the ad was served. For example, a click on an ad for digital cameras on a web page about photography tips may be worth less than a click on the same ad appearing next to a review of digital cameras.
Google saves you time and hassle by estimating the value of clicks and adjusting prices on an ongoing basis. With improved smart pricing, you should automatically get greater value for clicks from ad impressions across our network, all with no change in how you bid.
Other than this snippet, Google has given little information of how exactly Smart Pricing works. This has give to lots of specutlations. One thing is for sure. Smart Pricing focus on how well the clicks convert into customers for the advertiser. If the clicks convert well, the publisher will be well paid. If not, their earnings will be reduced, How do they determine the conversion rate is not known as I understand advertisers are not required to release their conversion rate to Google.
What Smart Pricing seem to like is focused sites. The more focused the site, the better it is, and focused sites with targeted visitors are more likely to result in the person who click on it to follow up with it (and therefore not result in Smart Pricing reducing the earning per click).
While Smart Pricing is good for advertisers, it affect publishers' earning. The question is, what can publishers do about it. From what they revealed:
"For example, a click on an ad for digital cameras on a web page about photography tips may be worth less than a click on the same ad appearing next to a review of digital cameras."
The thing to do about this is to create tightly niche posts that tightly focus on narrow topics. Try not to a post about general subject that try to cover everything.
Create good content. The best way to ensure you benefit from AdSense is to create compelling content for interested users. When you have good content, the chances of having relevant ads on your site is better. Perhaps you can try to do what this post advocate to get more relevant ads: Getting advertisement relevant to your content. When readers click on relevant ads, that means they are interested in the material in that ad and that means the chances of that converting to something useful to the advertiser is higher. Good content usually equals a good experience for user plus advertiser, which can be much more valuable than CTR. This is a good reason not to use traffic exchange programs like BlogExplosion where readers are only interested in getting more credits and hits for their sites and seldom click on ads.
One thing that is known is that price for clicks on on site is not affected by the CTR (Click Through Rate). I have written to AdSense Help Center, and they have specifically stated that earnings are not affected by Click Through Rates.