How the Google Search Ad Auction Works

If you’d like a simple introduction to how your Pay-Per-Click (PPC) money is spent via Google Search Ads, the above video will suffice. However, at less than 6 minutes, it can only introduce the basics. The following article expands upon the basics further but still stays within the bounds of an introduction.

Bear in mind that most of the PPC ads we see online are display ads and not search ads. They both have their place in the advertising world and it would serve you well to understand the difference.

SEARCH ADS VERSUS DISPLAY ADS

Display advertising is what most of us intuitively consider when we think of online ads. That’s because display ads are similar to all the offline ads we are bombarded with each and every day. We see ads on billboards, ads in store windows, ads in magazines, ads at bus stops and ads directly displayed on the buses themselves. And of course, ads pushed to us on TV and even prior to the start of films at our favorite movie cinema. Unfortunately, some of these ads may be completely irrelevant to our life.

When we’re online we see display ads on social media platforms, on news sites, on weather sites and on a multitude of other websites that we visit. These ads are also pushed to us.

Display ads can be text only, or they can be picture ads or they can be video ads. Regardless, all these ads are attempting to attract our attention and get us to click on them, so that we will be transported to their respective websites to “Learn More” or “Buy Now.”

Display ads are everywhere. However, you will see Search Ads only in one place: When you are searching for something via a search engine, such as Google.com. Hence, display ads are considered as “push ads” and search ads are considered to be “pull ads.” That’s because we pull search ads towards us when we are searching. More specifically, it’s the keywords we use when searching via a search engine that pull ads towards us.

For example, if you search for red shoes, you will see the natural or “organic” search engine results that pertain to your “red shoes” query. But oftentimes you will also see ads related to your search query. Per this example, you may see ads about “red shoes.” Sometimes you’ll see several ads at the top and bottom of the search results page. Sometimes you’ll see one ad. And sometimes you won’t see any. But whenever you’re searching for anything that has commercial implications, such as shoes, you are most likely going to see multiple ads.

It’s worth repeating that you will only see search ads when you specifically search for something online. And the ads you see will be pertinent to what you are searching for.

Generally speaking, search ads are more expensive than display ads, at least on a per-click basis, because they are better targeted and they produce better results. Although display ads have their place in the online advertising world and represent the majority of ads we encounter, for the purpose of this article, we are talking about PPC search ads and the Google Search Ad Auction.

GOOGLE SEARCH ADS

At the risk of belaboring the point, when we are talking about the Google Search Ads Auction, we’re only talking about PPC search ads.

The Google Search Ads Auction is what determines which search ads will be shown to searchers and in what order.

An operative word here is “auction,” which highlights that advertisers are bidding on search terms (keywords) to put their ads in front of relevant prospects. In other words, the reason search ads are able to be targeted to relevant consumers is because they are purposefully directed to the right prospects via the keywords they are using.

More specifically, search ads are shown only to individuals using designated keyword search terms. And advertisers are bidding to place their ads in front of those people. It’s a competitive process. This means some keywords cost more because more advertisers are bidding on them. For example, certain keywords cost over $50.00 for one click (not a sale, just a click) and many keywords cost a few dollars or less for each click.

The analogy of an “auction” serves to simplify the concept, although it’s an incomplete depiction. In other words, if you were to consider that the highest bidder has the greatest likelihood of having their ad seen and also having their ad at the top of the other ads, you’d be on the right track; but you’d be wrong.

In fact, the auction and the dollar amount that each advertiser is bidding to show their ads, is only one part of the calculations that determine ad placement and cost. To underscore the point, being willing to pay the highest price will not always result in your ad being placed at the top of other ads. Nor will bidding the highest amount even guarantee that your ad will be presented to searchers at all.

This minimizes the potential for advertisers to present ads about “Blue Hats” in front of people who are searching for “Red Shoes.”

GOOGLE SEARCH ADS AUCTION

For simplicity’s sake (and that’s what the above video highlights), the Google Search Ad Auction considers three main factors when determining ad placement. These factors are part of a calculation to formulate an “Ad Rank” (more on that in a moment).

  1. The advertiser bid, which reflects the “auction” part of the calculus.
  2. The quality of your ad, which includes a number of factors, but for brevity, if you’re bidding on red shoes your ad should be about red shoes (see more about “Quality Score” below).
  3. The expected impact of ad extensions, which represent additional information that can be appended to ads, such as a phone number or links to specific pages on your website. These specific pages would be different than the primary page that visitors will land when they click your ad. (Hence the term, “Landing Page“).

QUALITY SCORE

Although Quality Score is only one part of the search ad auction, it’s a big part and deserves some elaboration. Especially since it’s a larger topic than this introductory article or the above intro video can adequately cover. With that disclaimer in place, Quality Score considers three of its own factors:

  • Expected Click-through Rate (CTR)
  • Ad relevance to searcher’s keywords
  • Landing page experience

CTR is a statistical representation of the number of viewers who click on a specific online ad. It is commonly used to measure how effective the ad is at providing a good user experience. The higher your CTR, the better the ad is anticipated to perform.

Ad relevance considers how closely the language of your ad relates to the keywords the searcher is using. The closer the individual searcher’s keywords relate to your ad, the more relevant it is considered.

A Landing Page should be highly relevant to the ad and to the keywords. A Landing Page is good if it helps the searcher find what he/she is looking for. Such a landing page should be easy to understand, easy to use and transparent about your business, as well as how you would use any personal information that is collected.

Each of these three factors represents a brief intro to these topics. Doing an online search for any of the three will yield millions of results for each one.

AD RANK

Ad Rank is a calculation based upon the advertiser’s bid, the Quality Score of their ad (CTR, ad relevance and landing page), as well as their ad extensions.

  • Ad rank determines your ad position, relative to other ads.
  • Ad rank determines whether your ads will show at all.

Hence, a high bid with a low Ad Rank will not result in your ad being show frequently. Furthermore, depending upon the competitive landscape, it may not be presented at all.

In brief, the advertiser with the highest Ad Rank will have their ads shown the most frequently and shown over the top of other competitor ads.

COST-PER-CLICK

First of all, it’s important to appreciate that an advertiser only pays when someone clicks on their ad. This means some people may see your ad without clicking and might even visit your website without clicking. But in most cases, if someone is going to engage with your message, they will do so by clicking on your ad.

So how much will you pay for each click? The cost can and does vary. But you decide how much you are willing to bid or pay for each click. (Google and other ad platforms offer some relevant bid parameters to consider if you’re not familiar with a given market). However, in most cases, an advertiser usually pays less than they bid. In brief, the actual amount of your cost-per-click is based upon your bid relative to other bidders. In practice, based upon your ad rank, you will pay 1 penny more than the next closest competitor.

An important takeaway here is that you can improve your ad performance (which means raise your Ad Rank and lower your cost-per-click) by using ad extensions and especially by improving the Quality Score of your ads — which means making your ads more relevant and improving your landing pages to better serve the needs of ad visitors.

There is much more that can be studied and learned about this topic and from a practical perspective, if you’re trying to reduce ad cost and improve ad performance, you will need to delve into this much more and/or hire professionals to help you attain your online advertising goals.

PAY-PER-CLICK COMPETITION

You are not advertising in a vacuum.

The term “Auction” directly conveys the competitive nature of pay-per-click advertising. Unless you are advertising in a market with few competitors (which would be unusual), your PPC ads are competing against other PPC ads. At any given instance, there are ads being presented to searchers using commercial keywords. But there are many more ads that are not being shown at that same instant for the same keywords.

The nature of any competitive market is that you’re up against other players. Some who may be very experienced and some not so. This also means that even if/when you achieve a desired level of profitability with your advertising, the smarter and more aggressive competitors are monitoring your activity to see if you’re just a transient player who will soon disappear due to inexperience and/or inability (which translates to losing money). Or, if you’re a serious advertiser that will not only be taking a regular slice of the available business but perhaps will be attempting to dominate the same market they’re in. This means the existing dominant players will need to work even harder to maintain their advantage.

In other words, most competitive markets have dominant advertisers. These dominant players have advantages you don’t. Not only do they have better-performing ads than you, but they’re also paying less for them. If they got to their position due to lots of ad testing to continually optimize all the primary factors for successful advertising, they’re not only going to be hard to beat, but they may level up their game even further if they see new competitors who stick around long enough to become a respected player.

But the competitive nature of PPC advertising represents a double-edged sword. Just because some players are already dominant in a market does not automatically imply they are actually doing a sophisticated job of advertising. Some markets have weak competitors. In other words, such competitors are profitable enough to continue advertising, sometimes for years, but they are not so respectful of the ever-changing and evolving advertising opportunities. That means they are not abreast of what it takes to increase ad performance and lower cost. In other words, their dominance is based solely on the fact that no one else is doing a better job, not because they are doing a remarkable job.

If you’re advertising in a market with weak competitors, you have an opportunity to not only become profitable, but to become dominant.

This section about competition is not intended to be a point of discouragement, but rather a dose of reality. If your commitment to PPC is tentative and yet you’re entering a competitive arena, you ought to prepare yourself for a challenging experience. But if you are respectful of what it takes to win and you can sustain some loss in the beginning while you optimize your advertising to become profitable, you are best advised to not rest on your laurels when you achieve profitability. At that point, you really should pour on the coals to further increase ad performance and lower ad cost so that you can be the player who has a true competitive edge in your industry.

In brief, the reality of what it takes to become successful at PPC advertising is not addressed in this article. This article and the above video are about basic terms and concepts.

GOOGLE’S GOAL

Finally, it’s instructive to understand Google’s goal and hence the motivation that drives their search ad auction. Google is a business. They make a lot of money from advertisers. Their goal is to keep making more and more money. And they make money when people click on ads. This means there are two primary factors that benefit their business:

  • The more that people click on the ads the more money they make.
  • The better the experience for the people that click on the ads, the more likely they’ll click on more ads in the future.

Of course, the reverse is also important to appreciate:

  • If fewer people click on the ads, Google will make less money.
  • If people have a poor experience when they do click on ads, fewer of these people will click on ads in the future.

In brief, the auction process is established to facilitate a better ad experience for users of their search engine while simultaneously making Google more money. This process is specifically intended to marginalize low-performing ads. In other words, if your ads do not generate enough clicks, and if people who do click on them leave your landing page rapidly, these are some indicators of a poor ad experience and your ads may rise in cost and/or will be shown less (or not shown at all).

Conversely, ads that generate more clicks and higher user engagement (visitors stay on your website longer), represent a good ad experience and Google will reduce your cost-per-click and will show your ads more frequently.

If you always keep Google’s goal and motivation in mind when you’re planning and executing online advertising campaigns, you’ll be better positioned to execute the advertising successfully. (And make no mistake about it, plenty of people lose money through Pay-Per-Click advertising).

Because inexperienced advertisers lose money they self-select themselves out of the PPC advertising market. And because experienced advertisers who make money through the ads tend to invest more money into the advertising, it’s a win-win situation for those advertisers and Google. (Although Google is always positioned to have the upper hand).

The point is to evolve your advertising so that you are gaining the benefits of a win-win partnership with Google.

The natural evolution of PPC advertising over the past two decades has been an ever-increasing availability of more and more options (and decisions) intended to aid experienced advertisers while simultaneously (and inadvertently) making it more challenging for newer advertisers to grasp the game.

The PPC strategies that work today are more sophisticated than ever, but they are designed to help savvy advertisers increase ad performance while lowering ad cost (even while the overall tide of ad costs is rising).

Testing new ads and campaigns and optimizing performance is a never-ending process. And if you get too complacent, sooner or later another advertising competitor will surpass your efforts and take more of the profits off the table for themselves, at your expense.

If there’s one takeaway from this article, it’s that you’ll want to learn more about PPC advertising, even if you pay a professional or agency to handle it for you.