How does Google AdWords Auction Work?

Google Adwords basically works by reconciling the interests of three parties.

  1. The advertisers: who wish to show relevant ads that people would want to click on.
  2. The users: who want just relevant ads and don’t want to be bothered with irrelevant material.
  3. Google: which wishes to make the experience good for both the advertisers and the users so that they would come back again in the future.

· How does the auction work?

Every time a query is entered on Google, no matter what it might be for, Google runs an auction. In this case, the auction is for when the advertisers have to pay when the ad is clicked. Each query has a specific number of slots that the advertisers can bid on. The highest bidder gets the top slot and the rest follow gradually. The advertisers don’t have to pay the amount they bid for, but the amount that came second to theirs. Let’s say for example that the top advertiser bid $4, number two bid $3 dollar and number three bid $2. Then the top bidder would only pay $3, the second one will pay $2 and so on and so forth.

· Importance of Quality

Because Google wishes to make the experience good for both users and the advertisers, all ads have to go through a quality test which culminates into a number in the end.

The level of quality is decided by:

  • CTR (Click Through Rating): This gives the users the right to vote by clicking and deciding what ads they liked best.
  • Relevancy: Google decides the relevancy of the ads by analyzing the content and how well it relates to the keywords. This ensures that only relevant ads are displayed and that the advertisers can pay their way to the top.
  • Landing Page Quality: The quality of the page that is attached to the link is analyzed. The quality is determined on the relevance of the content, how many pop-ads pop up, how fast the page loads and how transparent the website is about its service.

· Ad Ranking

Ad ranking is determined by multiplying the actual bid with the quality score. Let’s assume that the top bid was for $3 and the quality score was 2. These two numbers are then multiplied (i.e. we get a score of 6). All bids are positioned and displayed according to who scored better. If the ad ranking is 4, or below, then the ad is not displayed at all.

· Determining Click Cost

The click cost is determined by how much the bidder is willing to pay to maintain their rank and their quality rank which must be better than their closest competitor. The quality rank is divided by the minimum bid and quality rank of the next highest bidder. The resulting number determines the final cost.

· The Value of Quality

The value of quality is another important factor that Google AdWords Auction remains dependent upon. Primarily, advertisers can improve their rank and pay less by improving their quality.

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