Web Marketing

Tech - Web Marketing
By: - at May 17, 2013

How Does Google Adwords PPC Auction Model Work?

Every time someone goes to Google and does a search, Google runs what's called the ad auction. It happens hundreds of millions of times per day and it takes only a fraction of a second, but it's what determines which ads you are going to see every time you do a search.

Pay Per Click Before Google
In the early days of the web, the model was that whoever was willing to bid the most for a keyword got that top spot. The second highest bid got the second spot and so on and so forth. This highest bidder approach was not great for users, because advertisers had no incentive to actually make their ads relevant or useful. And users generally do not appreciate non-relevant ads because they do not offer a searcher any additional value.

If you think about it, the majority of advertisers, they did not benefit from the old model either. This was a game that only those with the biggest budgets could win and they would simply buy their way into the top, and the search engines themselves suffered as well. If those irrelevant ads were not getting clicked on, then it did not matter how much the advertiser was bidding. They never had to pay up, because the ad never got clicked.

The Arrival Of Google AdWords
So Google changed the game by essentially letting more relevant ads be placed higher on the page, even if their bids were lower. This is essentially the model that made Google such a powerful force in the online advertising world. They were not the first PPC ad company, but their algorithms ultimately delivered better results and aligned the interests of searchers, advertisers, and the search engine itself. Google calculates something called AdRank for each advertiser in the auction and the positions on the page are just assigned according to the highest AdRank. Early on AdRank was just this simple formula. You not only had to bid enough, but your ad also had to get enough clicks to justify your ad's position on the page.

Relevance Is Key
This is how Google rewarded better, more relevant ads that users wanted to click on and it also made Google piles and piles of money. Over the years Google has updated this formula and instead of just using the click through rate, they have replaced it with something called the quality score. Now quality score is still made up mostly of click through rate, but it also includes a number of other relevance factors. See Google's quality score chart:

Google's Qaulity Score Chart for the PPC Auction

We will get into what makes up the quality score a little bit later, but for now it's just important to know that click through rate is a big part of it. So the way the AdRank is calculated is still pretty simple. It's just the max bid price multiplied by your quality score. Now each time someone does a search on Google the auction begins and everyone who is bidding on that search term gets their AdRank calculated. Then Google just fills in the ad slots in order of AdRank with the highest AdRank getting the first position.

Max bid x Quality Score = Ad Rank

How The Auction Works
So let's look at this example. Advertiser number 3 is bidding $4 per click and they have got a quality score of six. This gives them an AdRank of 24, which puts advertiser number 3 up in the top spot. Now advertiser number 1 is bidding twice as much and still they come in last place in the auction, because of their low quality score. And it's even possible that since their quality score is so low, Google won't show their ad at all.

Remember, this is pay-per-click and even though advertiser number 1 is willing to pay eight dollars for that click, Google knows that they won't get paid if this ad is so bad that it never does get that click. Now here comes the tricky part. As an advertiser you are not going to be charged exactly what your max bid is. That's just the highest price that you would be willing to pay.

Check out another example of Scoring with AdRank:
Example of scoring with AdRank

What Do You Actually Pay?
Once AdRank has been determined, the Google auction will determine how much each advertiser will actually pay if their ad gets clicked. The basic premise is that you will only have to pay the minimum amount needed to maintain your AdRank position. So let's take this same example. Advertiser number 3 is willing to pay $4, but they really only need to achieve an AdRank of 18 to stay in that top spot. So what price would they have to pay to keep their AdRank at 18? Well, all you have to do is take the AdRank of the advertiser in the position below you and divide it by your quality score.

In this case, you take 18 you divide it by 6 and you get $3. So even though advertiser number 3 was willing to pay $4, Google is only going to charge them $3. Now let's figure out how much advertiser number 2 is going to pay if someone clicks their ad. Well, we look at their AdRank, which is 16, and we divide it by advertiser number 2's quality score, which is 3. So if advertiser number 2 adís gets clicked they are going to get charged $5.33.

The Importance Of Quality Score
increase in quality score leads to increase in profitsThis is below their maximum bid, but it's more than the ad in the first position. Do you see why it's so good to have high quality scores? Let's keep going. To figure out how much advertiser number 4 is going to pay we take the AdRank of the advertiser number 1, which is 8, and divide it by the quality score of advertiser number 4, which is also 8. So if advertiser number 4 adís gets clicked, they will only be charged $1, which is a nice reward for having such a high quality score. Lastly, if advertiser 1 manages to achieve Google's minimum quality score to be included in the auction, they would have to pay the minimum bid price for the auction, which is set by Google.

Increasing Quality Score
Now let's take a look at what happens when you increase your quality score. In addition to affecting your overall AdRank, it can also mean that you pay less. What would happen if advertiser number 3 raised their quality score from a 6 to an 8? Well, their ad rank would now be 32 instead of 24 and advertiser number 3 is still in the top spot but let us take a look at how much they would actually be paying for a click now.

To calculate this all we have to do is take a look at the AdRank of advertiser number 2, which is still 18, and divide it by our new quality score of 8 to get $2.25. So now we are paying less than half of advertiser number 2 and still beating them out for the top spot. Understanding the auction process gives us a way to really understand how we can optimize our ads to get the best positions possible for the best price possible.

google adsense

And Finally
As you can see from our little example, quality score has a very real effect on the success of your campaigns and if you understand how AdWords works, you can get out ahead of your competition for less than they are paying.





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