How Exactly Does Google AdWords Work?

The key to how Google AdWords works is the Qual­i­ty Score. Qual­i­ty Score is gen­er­al­ly how well an ad group, key­words, ad, and land­ing page relate to what a per­son is search­ing for, and how like­ly some­one is to click on the ad. Here is Google’s page for “Check and under­stand Qual­i­ty Score.”

Now every time some­one does a search on Google, an AdWords auc­tion is cre­at­ed. Every adver­tis­er who has a key­word match to the search query com­petes in the auc­tion. How well each adver­tis­er com­petes is based on their Ad Rank. Again, using a slight­ly sim­pli­fied version:

Ad Rank = Qual­i­ty Score * Bid

Ads are placed in order based on Ad Rank. The high­est Ad Rank gets the top spot and so on down to either the last ad qual­i­fy­ing for the auc­tion or the last posi­tion on the page.

What an adver­tis­er actu­al­ly pays is the low­est amount nec­es­sary to beat the Ad Rank of the com­peti­tor below them. This is called the dis­counter, and there are a few ques­tions on every cer­ti­fi­ca­tion exam relat­ed to under­stand­ing this. In a lot of ways, under­stand­ing this infor­ma­tion is the key to real­ly unlock­ing AdWords. Every time I’ve pre­sent­ed this in a train­ing class or sem­i­nar, a major­i­ty of the peo­ple about fall out of their chairs.

$$ = Ad Rank to beat / Qual­i­ty Score + $0.01.

Let’s put this into action using real exam­ples and I’ll show what I mean about the impor­tance of Qual­i­ty Score (QS).

+vir­ginia +beach+house +for +sale has a QS = 8

Let’s say we want to show up in the 1st posi­tion on the page no mat­ter what. We can’t guar­an­tee this, but we can cer­tain­ly be pret­ty cer­tain by over bid­ding the key­word to say $100/click.

Ad Rank = 800 = (QS 8 * $100 Bid)

To beat us, a com­peti­tor would have to get an ad rank > 800. This means even if they had a QS10 key­word, they would have to bid $80.01/click to get the top spot. Assum­ing they have a more real­is­tic bid of $10/click, the amount we would pay in the auc­tion is cal­cu­lat­ed as follows.

Ad Rank to beat = 100 = (QS 10 * $10 Bid)

$12.51 = 100 / 8 + $0.01 = (100 Ad Rank to beat / our QS 8 + $0.01)

So even though we bid $100, we only pay $12.51.

If our Qual­i­ty Score on that key­word in that auc­tion was 10, then the amount we would pay is:

$10.00 = 100 / 10 + $0.01 = (100 Ad Rank to beat / our QS 10 + $0.01)

Here’s where it real­ly gets inter­est­ing; the per­son in the top spot could actu­al­ly pay LESS than the peo­ple in the spots below them.

Crazy, right? Here’s why that hap­pens. Assume the same crazy $100 bid for the top spot, but now let’s say the next com­peti­tor only has a Qual­i­ty Score 5 key­word on a $10 bid, the posi­tion 3 per­son has a QS 7 key­word on a $7 bid and the posi­tion 4 per­son has a QS 5 key­word on a $9 bid.

Position 1:

Ad Rank to beat = 50 = (QS 5 * $10 Bid)

$6.26 = 50 / 8 + $0.01 (50 Ad Rank to beat / our QS 8 + $0.01)

Position 2:

Ad Rank to beat = 49 = (QS 7 * $7 Bid)

$9.81 = 49 / 5 + $0.01 (49 Ad Rank to beat / #2 QS 5 + $0.01)

Position 3:

Ad Rank to beat = 45 = (QS 5 * $9 Bid)

$6.44 = 45 / 7 + $0.01 (45 Ad Rank to beat / #3 QS 7 + $0.01)

In this exam­ple, our QS 8 key­word in posi­tion 1 actu­al­ly pays less than posi­tions 2 and posi­tion 3. This same cal­cu­la­tion holds true no mat­ter what posi­tion you show up in, so the per­son in posi­tion 3 could pay less than posi­tion 4 and so on.

If you have a Qual­i­ty Score 10 key­word, you con­trol the auction.

With a Qual­i­ty Score 10 key­word, you know that not only are you pay­ing the least amount pos­si­ble for the posi­tion you are get­ting, you are forc­ing EVERYONE above you to pay the MOST! They can’t beat you unless they out­bid you. We’ve used this in the past to actu­al­ly force a com­peti­tor out of a key­word, pri­mar­i­ly when the com­peti­tor was buy­ing a brand­ed key­word where we knew we would have the high­est Qual­i­ty Score (and con­ver­sion rate).

I’ve used this tech­nique in both trav­el (where Expe­dia was buy­ing a hotel’s name) and with attor­neys (where anoth­er attor­ney was buy­ing my clien­t’s name). It’s kind of fun to sit in posi­tion 2 and slow­ly raise the bids on a QS 10 key­word know­ing that the auto­mat­ed sys­tems on the oth­er end are just increas­ing the bids and costs for the com­peti­tor. All the while, we’re only pay­ing the min­i­mum amount to show in the auc­tion because there were no oth­er com­peti­tors. They won’t con­tin­ue to pay 10x more than you per click for long.

I used to think that just about all pro­fes­sion­al PPC man­agers under­stood this con­cept, but as I’ve met and worked with more and more of them it seems that prob­a­bly less than 5% of them real­ly get what is hap­pen­ing under the hood (Some would prob­a­bly say less than 1%).

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