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

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

The quality score and related metrics can be viewed on the Google Ads platform as depicted for an advertising campaign on the property platform,, 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.

Previous     Next

Note: To find content on MarketingMind type the acronym ‘MM’ followed by your query into the search bar. For example, if you enter ‘mm consumer analytics’ into Chrome’s search bar, relevant pages from MarketingMind will appear in Google’s result pages.

Digital Marketing Workshop

Digital Marketing Workshop

Two-day hands-on coaching on Digital Marketing and Advertising, to train participants in developing and executing effective digital marketing strategies.

What they SHOULD TEACH at Business Schools

What they SHOULD TEACH at Business Schools

Marketing has changed. More so in practical terms, and marketing education is lagging.

The fundamental change lies in the application of analytics and research. Every aspect of the marketing mix can be sensed, tracked and measured.

That does not mean that marketers need to become expert statisticians. We don't need to learn to develop marketing mix models or create perceptual maps. But we should be able to understand and interpret them.

MarketingMind helps. But the real challenge lies in developing expertise in the interpretation and the application of market intelligence.

The Destiny market simulator was developed in response to this challenge. Traversing business years within days, it imparts a concentrated dose of analytics-based strategic marketing experiences.

Dare to Play

Dare to Play

Like fighter pilots, marketers too can be trained with combat simulators that authentically reflect market realities.

But be careful. There are plenty of toys that masquerade as simulators.

Destiny is unique. It is an authentic FMCG (CPG) market simulator that accurately imitates the way consumers shop, and replicates the reports and information that marketers use at leading consumer marketing firms.

While in a classroom setting you are pitted against others, as an independent learner, you get to play against the computer. Either way you learn to implement effective marketing strategies, develop an understanding of what drives store choice and brand choice, and become proficient in the use of market knowledge and financial data for day-to-day business decisions.