The Subtle Science Of Bidding Part 1: The Real Story

Regardless of how experienced you may be with AdWords, and with interpreting data that Google reports about your campaigns, you’ll occasionally see numbers that simply don’t make sense. What do you do when reported data flies in the face of both reason and experience?

As an example, look at this data for an exact match brand keyword. The data is normalized to eliminate day of week effects.

Bid CPC Avg. Position Clicks Impressions
$ 23.38 $1.35 1.01 1,868 14,105
$17.80 $0.50 1.09 1,701 9,039
$9.42 $0.33 2.01 900 5,625

Do the numbers surprise you? They did when I first saw them. In fact, with my knowledge of the auction marketplace and information provided by Google’s AdWords help, I still couldn’t make sense of these numbers. Here is why I thought this data looked weird:

  • Given that a bid of $23 got me an average position of 1.01 at a CPC $1.35 why did a $9.42 bid get me position 2.01? I should expect position 1 as my bid $9.42 bid is so much higher than the actual position 1 CPC.
  • Why did my impression volume drop when I changed my bid from $23.38 to $17.80? Oddly enough, my click volume did not change much.
  • Why did my CPC increase so much from position 1.09 to 1.01?
  • Why the huge gap between bid and CPC?

In short: What gives?

As I analyzed this data and consulted with my company’s CTO Dr. Anil Kamath and Director of Research, Dr. Abhishek Pani, I learned so much about the nuances of Google’s auction marketplace that I thought it would be worth sharing.

In this post, I’ll focus on the details of search auction mechanism. Although I am using Google data to explain my point, all search engines employ a similar strategy to determine your CPC.

What AdWords tell you

The official Google AdWords help pages tell you that the CPC you pay is a function of your bid, quality score and of your competitors’ bid and quality score. The process for calculating the actual amount you pay works like this:

Step 1: Google calculates anAdRank for all advertisers in the auction in which AdRank = Quality Score * Bid.

Step 2: Advertisers are ordered in the descending order of their AdRank. This determines your rank in the auction process.

Step 3: Your CPC is calculated as:

CPC = (The next closest and lower AdRank to yours)/ Your Quality Score + $0.01

Let’s use the following dataset to understand how the auction mechanics work.

Advertiser Bid CTR QS Ad Rank=QS*Bid ADR2=CTR*Bid
You $25 15% 10 250 3.25
B $10 8% 7 70 0.8
C $10 2% 4 40 0.2

According to Google, you have the highest AdRank, so you win the auction and you get position 1. The CPC you pay is:

CPC = Ad Rank of B / 10 + $0.01 = 70/10 +0.01 =$7.01

However, this explanation is incomplete and in many ways incorrect for the following reasons:

AdRank is a product of a continuous variable thats strongly correlated to CTR and bid rather than quality score and bid. For the sake of convenience, I shall call this AdRank2 or ADR2 and assume that the quality score is the same as CTR. As CTR and Quality Score are very strongly correlated, this modified AdRank does not differ very much from Google’s explanation. However, while using QS or ADR2 will not affect your position in the above auction, it would affect the CPC calculation. For instance: In this example using ADR2 would give you an effective CPC of $5.33 (0.8/15%).

In addition, the explanation doesn’t answer the question posed by the first example—why bidding substantially higher than position 1 CPC could still get you position 2. It also doesn’t answer why a lower bid might get you the same position but a lot fewer impressions, especially on the brand words.

The actual auction mechanism

The actual mechanism by which CPC is determined is best understood in 3 steps:

  • Your bid and your competitors’ bids determines the auction marketplace. Google uses your bid and your competitors’ bids to determine which keyword match type and bid combinations participate in an auction at the query level.
  • Once Google determines which bidders can participate in the auction, AdRanks are calculated based on CTR or a CTR proxy and bids. Note that the CTR proxy that Google calculates is an estimate of CTR at position 1. So if your ad has never been in position 1, Google estimates it. As with any calculation, the estimates could be way off. This in turn could hurt your CPC.
  • If you want your ad to display at the top of a result page (above the organic listings), Google has an artificial threshold you have to beat. So in a sense, Google’s organic results are competing with you for rank.

This “modified” auction mechanism explains the questions I posed about the first dataset I showed you above. We can draw a couple of conclusion from this.

First, the bid and CPC are more decoupled than we usually think. The bid determines the type of advertisers you are going to compete against. A very high bid on a broad match keyword means you participate in many auctions and this means more impressions and clicks. This explains why we saw a big drop in impressions even at the same position (1.01 to 1.09).

Second, the CPCs we observed for position 1 and position 2 are in a sense independent because the participants for those auctions were different. Hence, although you bid higher than the position 1 CPC, you could get position 2 because Google let another high bidding advertiser participate in your auctions when you were bidding low. I cannot calculate the CPC at position 2 just by looking at position 1 CPC. You have to look at the bid and the CPC. Note: We model CPCs by looking at the combination of bid, CPC, clicks and impressions to get a 90-95% model accuracy. So while it appears difficult to model, it is possible with sophisticated math.

If you are confused at this point, you are not alone. The auction marketplace is very opaque and complex where simple CPC and quality score explanations just do not explain trends we observe in real life. There are many, many more nuances that I’ll discuss in coming posts.

So what do we make of all this?

When making your bidding strategies and decisions keep the following in mind:

Your bid is far more important than is generally thought. Not only does it determine your CPC, it determines the competitors of your auction marketplace and the number of impressions you will get.

Position is only an artifact of the auction. It doesn’t determine anything. Aside from brand considerations, don’t pay undue attention to it. Instead pay attention to bid, CPC, clicks and ROI. They are your true performance metrics.

Dramatic bid changes can adversely affect CTR estimates. As said, search engines make CTR estimates about your keywords as they move positions. These changes can really hurt your CPCs.

Number 1 isn’t always best. For brand keywords, if your strategy is to bid really high to position 1 and subsequently leaving the bid alone, you might be setting yourself up for disaster. Google will charge you a higher CPC but you will not get many more clicks in return. Hence, you must watch performance of all keywords even if you just want to get them to the top position only.

I’ll illustrate the final two points in my next post with real life examples. Stay tuned!

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: Analytics | Search & Analytics


About The Author: is Director, Business Analytics at Adobe. He leads a global team that manages the performance of over $2 BN dollars of ad spend on search, social and display media at Adobe.

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  • George Michie

    Great post, Sid. We see this too, and speculate that the additional auctions those top ranking KW qualify for when bids are pushed get farther and farther afield in terms of broad matching. The conversion rate for the incremental traffic generated in these cases is horrendous.

  • Terry Whalen

    George, I agree. Broad match is a totally different animal and broad-match keywords warrant extra close attention – especially with bids.

    Adding negatives from search query data can help reign in risks of high bids on broad match terms.

  • George Michie

    Terry, Sid, my cracker-jack analysts have informed me that I’m missing the point. What Sid is talking about, and what we’re seeing in the data impacts EXACT match keywords on only, too.

    In these cases we don’t see impressions increase much if at all, but CPCs do increase. Two thoughts: 1) the advertiser in position 2 engages in pre-Panama bid jamming activities when your bids increase; or 2) much more nefarious: Google sees the gap between the position 1 AdRand and position 2 AdRank increase, recognizes an opportunity to make more money, and draws in other high bid broad match terms to drive up the CPC. Why wouldn’t they do this all the time? Those broad matched ads are less relevant, giving a poor user experience which isn’t in there long term interest, but in the short term…

    #1 is more likely as #2 would be evil, and we know that Google isn’t evil.

  • Terry Whalen

    Good point – we’re talking about who is let into the auction for the search term – whether your own kw is entered into the auction for a particular query, and whether various competitors’ kw’s are entered into it. So, with an exact-match term Google doesn’t really have much flexibility on whether *my bid* is in the auction (given a reasonable bid and QS/CTR), but they still have plenty of leeway on whether other advertisers are let in (especially if those advertisers are using phrase/broad match).

    But I see much more “weird stuff” happening with broad match terms, since for broad match Google has so much leeway on which auctions they let *me* into.

    I have a hard time thinking that bid jamming is going on. I always thought the enabling factor was Yahoo’s disclosure of current advertiser bids. I’m thinking that: a) in order to bid jam, you have to know what bids are out there, and b) there’ s no way to know what bids are these days (screen-scraping won’t do it).


  • sidshah

    George, Terry; good discussion. The example I gave was for an exact match keyword. So yes, I am seeing this pattern for exact match as well as broad match. As Terry pointed out, Google doesnt have much leeway for your exact match but it can let in a really high bid broad matched keyword and mess up your CPCs. Essentially, the search engines are constantly making a tradeoff between (a) Increasing their profits and (b) Ticking off users with irrelevant ads (not to mention advertisers!). The end result is this observed behavior. What I also notice is that Google charges you a HUGE premium in going from avg. position 1.0X ( X is a number from 0 to 9) to 1.0 . I am going to discuss why in my next post.

  • davidryan

    Thanks for the great post and i accept with this that the Broad match is a totally different animal and broad-match keywords warrant extra close attention especially with bids.

  • BlackHat

    Really interesting article and is something we have been seeing a lot of recently. We have it from a Google insider that Google uses something we have called ‘smart pain’ where it changes it’s PPC algorithm to amend CPC’s for different forms of advertising – Search, Search Partners, Content, Mobile, etc.

    We have also seen how Google can change this part of it’s PPC algorithm between different countries depending on how expensive it wants Google AdWords to be when competing with other forms of advertising within different territories.

    We don’t believe that Google’s auction exists in the way that they want everyone to think it does. We believe they even have different categories of AdWords accounts and depending on which category your account sits, has an effect on what CPC’s you pay. How Google determine which category your account sits in is anyone’s guess, however, we think it’s to do with your onsite conversion rate as Google will send you more traffic and cheaper CPC’s if your site converts well in order to make advertisers happy and spend more with Google.

    One thing we are sure about is that as you have stated in your post, the way Google determines CPC’s in an auction is not as transparent as they lead everyone to believe.


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