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

PPC Terms and Definitions

There are a few more terms used in Adwords and PPC in general that you should all be familiar with. I use them in this report a lot and I assume you know what they mean. If not, this section is where you will get definitions. Content Network. All sites that display Adwords ads (signed up to the Adsense program to generate revenues), are part of the content network. Other PPC search engines use the same or very similar term. Conversion. Typically, a conversion is any time that a visitor to your site buys something. However, a conversion could be anything you want to track and not necessarily a purchase. You may want to track downloads of a free document or software which may not involve a monetary exchange or sign ups to a free newsletter.

CPC is cost per click. This term can cause some confusion because Adwords for example uses it to mean your bid as well as your average cost incurred for each click. Others still use the term when they really mean PPC (they use it to differentiate it from CPM which means cost per thousand). For our purposes, it means only one thing: the average cost you pay for each click. Continue reading