How the PPC ad auction works

Search engines don’t show ads for every query, but when a query is monetized, an auction takes place as soon as the user searches. A variety of factors will determine:

  1. An advertiser’s eligibility for the auction
  2. The subsequent order in which eligible ads appear on the page
  3. How much each advertiser will pay if their ad is clicked

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).

The second is what’s known as an ad’s Quality Score, which is a combination of factors (see below.) Once an ad is eligible for the auction, the combination of Max CPC times Quality Score is calculated as Ad Rank to determine in what position it will show.

What is Quality Score?

Quality Score plays a big role in what position ads appear in the search results and how much an advertiser will pay per click. Advertisers don’t see an ad’s actual Quality Score, but Google does show an external Quality Score of 1 (bad) to 10 (excellent) at the keyword level in AdWords. When Quality Score improves, cost-per-click may (CPC) go down and/or average position improve.

Google looks at three things when calculating Quality Score:

  1. Expected click-through rate (CTR), which reflects the likelihood a user will click on an ad.
  2. Ad relevance to the query. The ad copy should clearly relate to what the user is looking for.
  3. Landing page experience. Are the users directed to a page that reflects the intent of the query, and does that page provide a good user experience?

How does Google weigh each of these factors?

Google has only recently made Quality Score data available. In 2016, after analyzing a large set of Quality Score data exported from the AdWords API, Brad Geddes, founder of AdAlysis, reverse-engineered the formula for the Quality Score surfaces in AdWords accounts:

Quality Score = 1 + Landing Page Experience weight + Ad Relevance weight + CTR weight

He then determined the weighting Google gives to each of the three factors:

  • Landing page experience: 39%
  • Expected CTR: 39%
  • Ad Relevance: 22%

Now we have a blueprint for prioritizing optimization efforts aimed at increasing Quality Scores. Advertisers should focus first on improving CTRs by testing ad copy and landing page experience (that may mean improving speed, choosing a more relevant page and so on) to improve site engagement and reduce bounce rates. Then focus on ad testing to improve relevance to the query.

In 2017, Google began showing historical Quality Score data in the interface to help advertisers analyze how changes affect their scores.

What is Ad Rank?

Ad Rank determines the positions in which ads participating in the auction are shown. The better the Ad Rank, the higher the position. The best Ad Rank gets the top ad position.

It takes into account an ad’s Quality Score and the advertiser’s Max CPC, plus the expected click-through rate (CTR) impact of the ad extensions and formats available. Here’s the basic formula:

 Ad Rank = Ad quality score x Max CPC [+ a combination of other factors, including the context of the search such as device and expected impact of ad extensions]

How is CPC calculated?

Ad Rank has a big impact on the actual cost-per-click (CPC). It’s often misstated that advertisers pay one cent more than the advertiser in the spot below them. But that’s really just a piece of the CPC calculation. CPC is calculated using this formula:

CPC = The Ad Rank of Advertiser Below/Quality Score + $0.01

In AdWords, 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:

Fig. 6 – A typical AdWords auction

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.

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