How the PPC ad auction works
Search engines don’t show ads for every query. But when the search engine determines a user’s query has commercial intent (i.e., a user is looking for information about a service or product), an ad auction occurs immediately.
A variety of factors determine:
- An advertiser’s eligibility for the auction.
- The subsequent order in which eligible ads appear on the page.
- How much each advertiser will pay if their ad is clicked.
Your bid. The first factor is how much an advertiser is willing to pay for a click. Advertisers set a maximum bid (called Max CPC) that they’re willing to pay. Bids can be set at the individual keyword level or at the ad group level (a grouping of related keywords).
Your relevance. The search engines aim to show ads that users will actually want to click on. If ads are relevant, users have a bad experience and the engines miss out on revenue from ad clicks. That’s where the second factor of ad relevance comes in.
An ad’s Quality Score is a combination of relevancy factors that we’ll get into below. When an ad is eligible for the auction, the engines perform a calculation:
Max CPC X Quality Score = Ad Rank
That determines where an ad will show on the page.
Here’s an overview of how the PPC ad auction process works:
- Advertiser sets up a campaign: An advertiser creates a PPC campaign, chooses relevant keywords or placements, sets a maximum bid (the highest amount they’re willing to pay per click), and crafts ad creatives (the ad copy and design).
- User performs a search or visits a website: When a user searches for a specific keyword on a search engine or visits a website with ad placements, the platform triggers an ad auction.
- Eligible ads enter the auction: Ads that match the user’s search query or the context of the website are entered into the auction.
- Ads are ranked based on multiple factors: In the auction, ads are ranked based on a combination of factors, which may include:
- Bid amount: The maximum amount an advertiser is willing to pay for every click on their ad.
- Ad quality: The relevance and usefulness of the ad to the user, which can be measured by factors like click-through rate (CTR), ad text, and landing page experience.
- Ad extensions and other ad formats: Additional information or features included in the ad, such as site links, phone numbers, or ratings, may also impact ad rank.
- Platform-specific factors: Some platforms have their own unique factors that influence ad ranking, such as Google’s Ad Rank or Facebook’s relevance score.
- Quality Score. Ad Rank does not directly take Quality Score into account. Just because you have a high Quality Score doesn’t mean your campaign will have a high Ad Rank. At the same time, Ad Rank does take into account the same factors as Quality Score. And they are a key part of improving your Ad Rank.
- Winners are determined: The ad with the highest combined score (based on the above-mentioned factors) is usually placed in the top position, followed by ads with lower scores in descending order. The actual cost per click (CPC) is determined by the auction, and advertisers typically pay just enough to outbid the next highest competitor, rather than their maximum bid.
- Ads are displayed, and advertisers are charged: The winning ads are displayed on the search engine results page (SERP), website, or social media platform. When a user clicks on an ad, the advertiser is charged the agreed-upon CPC.
How is CPC calculated?
Ad Rank has a big impact on the actual cost-per-click (CPC) an advertiser pays when someone clicks on their ads.
It is often misstated that advertisers pay one cent more than the advertiser in the spot below them. In fact, that’s really just one piece of the CPC calculation. CPC is calculated using this formula:
CPC = The Ad Rank of Advertiser Below/Quality Score + $0.01
In Google Ads, because pricing is based in part on the Ad Rank of the next competitor, actual CPCs can vary widely.
Here’s an example of what the ad auction looks like in practice:
Ad Rank (Max CPC Bid x Quality Score) determines the position in which an ad is shown. The Ad Rank of the ad below is factored into the actual CPC that an advertiser will pay if someone clicks on their ad.
Dig deeper. What is RGSP? Google’s Randomized Generalized Second-Price ad auctions explained
Chapter 3 of our guide will teach you what you need to build an effective PPC strategy.
Read more of Search Engine Land’s Complete Guide to PPC (Pay-Per-Click) Advertising:
- What is PPC – Pay-Per-Click marketing?
- Chapter 1: Where PPC ads appear
- Chapter 2: How the PPC ad auction works
- Chapter 3: How to build an effective PPC strategy
- Chapter 4: How to track and measure PPC campaigns
- Chapter 5: How to set up up your PPC account
- Chapter 6: How to structure PPC campaigns
- Chapter 7: PPC keyword research and match types: what’s important
- Chapter 8: Setting up a paid search campaign
- Chapter 9: Beyond keyword targeting in Search: location, device, audience and demographic
- Chapter 10: Bidding and bid adjustments in paid search campaigns