How Does Adwords Work?

Adwords is not a straight bidding auction. You can be the highest bidder for a keyword, yet, not get the top spot. The position your ad appears in is determined by two factors: your bid and the quality of your ad. The quality of your ad is called Quality Score by Google. There are many factors involved in calculating the QS, which I’ll discuss later, but for our purposes at the moment, let’s assume that it is your click rate. In fact, your ad’s CTR is responsible for 65% of your QS so that’s not far from the truth. Let’s take five advertisers, their bid in cents, their CTR and resulting ad rank:

Advertiser Bid               CTR Ad Rank

A1      $0.30                  6.7      201.0
A2      $0.28                  5.5      154.0
A3      $0.25                  5.4      135.0
A4      $0.25                  4.9      122.5
A5      $0.20                  5.1      102.0

The two factors, bid and CTR, are multiplied together which results in a number called the ad rank. If you have a CTR of 4.3% and bidding $0.25, your ad rank is 107.5 (4.3 times 25). In order for someone to be placed higher than you, their ad rank calculation would have to be more than 107.5 and can be achieved by increasing their bid or increasing their click rate. If their CTR is only 2%, their bid needs to be at least 54 cents. However, if their CTR was 5%, they only need to bid 22 cents to be ranked higher and only 16 cents if it was 7%.

In other words, Google rewards advertisers for creating good quality ads (read: high click rates) It is therefore best to get higher click rates as much as possible since your bid can remain the same or be lowered to get the same ad ranking you did before, not to mention getting more traffic for the same price. In fact, as we will see next, your actual cost will go down. It is therefore very important to understand the ranking system. Sure, you can always increase your bid to achieve a higher ranking and (possibly) better results. But smart advertisers know they can achieve those same results at lower costs simply by improving their ads. Continue reading