Google’s Ad Auction — How it Works


Exhibit 18.3   Google’s Ad Auction — How it Works. Source Google.

Posted by Google, the video in Exhibit 18.3 provides a coherent explanation of how the Google’s Ad Auction works.

An auction is triggered when advertisers are bidding for keywords that are relevant to a user’s search query.

In the auction, ads are ranked based on a metric referred to as Ad Rank, which is based on the maximum CPC (cost-per-click) bid and the ad’s quality score.

$$Ad \;Rank = CPC \;bid × \;Ad \;Quality$$

The Ad Rank determines which ads are shown, the order they will appear, and how much they will cost.

There are three components to the quality score, and the biggest by far, is the click-through-rate (CTR). In computing this component’s score, greater weight is given to the recent history of the site’s CTR on Google.com.

The CTR is the means of incorporating users’ feedback to the Ad Rank. Incidentally, since advertisers pay for clicks, it also maximizes Google’s revenue.

Relevancy is the next largest component. It is important because relevant and useful ads enhance users’ experience. The third component is the landing page quality.

How much does an advertiser actually pay?

To answer this question, let us suppose advertisers A, B, C, D bid $4, $3, $2 and $1 respectively and their ad quality scores are 1, 3, 6 and 8, as shown in the Exhibit 18.3.

In this example, C secures top Ad Rank of 12 ($2.00 × 6), followed by B with Ad Rank 9 ($3.00 × 3).

Google charges advertiser C the minimum amount required to secure the top position. Based on the data, C would match B’s Ad Rank of 12, with a bid of $ 1.50 (9 ÷ 6):

$$Ad \;Rank \;to \;match = B’s \;Ad \;Rank = $3.00 × 3 = 9$$ $$Bid \;required \;by \;C \;to \;match \;B’s \;Ad \;Rank = 9÷6 = $1.50$$.

If there is no competing bid, advertisers pay what Google refers to as the minimum CPC. This amount, which is assigned to each keyword in the advertiser’s account, is dependent on the CTR, the account’s quality score, the quality of ad copy and landing page, and relevancy factors.


Exhibit 18.3a   Quality Score based on Expected CTR, Ad relevance, Landing page (exp) — as depicted on Google Ads, based on mas-HomeFinder.com.

The quality score and related metrics can be viewed on the Google Ads platform as depicted for an advertising campaign on the property platform, mas-HomeFinder.com, in Exhibit 18.3a. Note also the column labelled ‘Policy Details’. If the quality score is too low, or if the ad content is ‘prohibited’ by Google, then the keyword is disapproved.

For the practitioner, a key question is how much to bid.

You need to first consider pricing models, which are covered in section Campaigns and Budgeting. Cost per click (CPC), the most frequently used model where advertiser pay only for clicks, is a good choice for beginners.

The average CPC on Google Ads vary substantially by keyword and industry. Based on benchmarks compiled by WordStream, the average cost per click is roughly USD 2.32 on the search network, and USD 0.58 on the display network (third-party websites that have agreed to show Google ads).

To gauge the return on advertising spend and optimize the bid, consider employing tools such as the Keyword Search Volume Forecast facility supported by Google Ads Keyword Planner.

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