Every time a query is made on Google’s search engine, two algorithms will decide the order in which results will appear. The first algorithm delivers the non-paid (organic) search results, which are displayed ten results per page. The websites that are best optimized for search engines will rank near the top.
The second algorithm provides the paid search results. The number of paid search ads displayed on a search results page depends on the specific query, with the top 3 positions being the most valuable. While Google runs a paid search auction for every query that is made on their search engine; advertisers only pay when a user clicks on their advertisement.
There are three parties involved in a paid search campaign: Google, the advertisers, and end-users. While users want to see ads that are relevant to their searches, advertisers want users to click on the ads and Google wants to keep both groups happy.
How Does Google Decide the Order of Paid Search Results?
To better understand how Google decides an ad’s position on a search engine results page, we need to understand Ad Rank and its key factors. Ad Rank is a number determined by two components: Max Bid and Quality Score. The higher the Ad Rank number, the higher the position the Ad is going to be shown within Google’s results pages. Max Bid is the highest amount of money that the advertiser is willing to pay for a click on their ad. In a simple auction, if Competitor A has a max bid of $2.00, and Competitor B has a max bid of $3.00, Competitor B will rank above Competitor A. However, Competitor B will not necessarily pay $3.00 if the user clicks the ad, they will only pay the minimum amount that is necessary for them to keep the higher position.
It gets more complicated because Quality Score, which is determined automatically by Google, is an additional factor advertisers must consider. Quality Score measures a keyword’s relevancy to the ad copy and destination URL landing page and attempts to keep irrelevant or less credible advertisers from buying their way onto search engine results pages.
The Three Key Elements of Quality Score
- Click Through Rate (CTR) is measured by dividing the number of users who click on the ad by the number of times the ad was delivered by Google. As users vote through their clicks, they are effectively communicating which ads are best. CTR is the most important factor for Quality Score.
- Relevancy is the second most important factor to Quality Score. Only ads that are relevant to the user’s search will appear. Google analyzes relevancy by considering language and context to determine how well the advertiser relates to the keywords. This prevents advertisers from showing irrelevant ads to Google users.
- Landing page is the page where users are going to be directed when they click on an advertisement. A quality landing page has original and relevant content, minimum pop-ups, easy to find information, quick load times, and is transparent about the nature of the business.
To get the AdRank number, Google multiplies the (Max Bid) x (Quality Score). The higher the AdRank number, the higher the advertisement will rank on the Google search engine results page. Although an advertiser can bid a lot of money, if the quality score is not good, then the advertisement will not likely receive an optimal position.
So, How Much Do Advertisers Pay Per Click?
Whenever multiple advertisers have the same max bid, the actual cost per click (CPC) of the first advertiser will be the AdRank of the second advertiser divided by the Quality Score of the first advertiser. The CPC of the second advertiser will be the Ad Rank of the third advertiser divided by the Quality Score of the of the second advertiser, and so on.
THE FORMULA TO CALCULATE CPC IS: PRICE1 = (B2 * QS2) / QS1
The below charts demonstrate how Quality Score and Max Bid affect Avg. CPC in a mock auction.
In the first example, all advertisers have the same Max Bid; however, each advertiser differs in Quality Score. With all bids equal, Quality Score is the determining factor for Ad Position and CPC.
The second chart displays a more typical auction scenario where each advertiser has a different Max Bid and different Quality Score. Note how the highest bid does not always equal the best position.
The Value of Quality
Quality score will increase if an advertisement has a good CTR, query relevance, and an appropriate landing page. If the Quality Score increases, both the AdRank will increase and the advertiser’s cost per click will decrease.
This process keeps advertisers pleased with Google’s paid search system, as more users will click on their advertisements. Likewise, because users are finding information relevant to their searches, they will remain confident in ads placed on Google search results pages.