How Paid Search Auctions Work

Have you ever wondered how the paid search auction in Google works? If your company is investing in Google advertising, it’s important to understand the fundamentals of how the paid search auction market works. In this article, we are going to break down how Google decides the order of the advertisers, how much you pay when you get a click on your ad, and how you can take advantage of that knowledge to optimize your account.

To understand how the paid search auction works, let’s look at an example:

paid search auction example

In this example, we are looking at the search engine results pages for the query “dog food”. Every time a user searches for a word like this, Google runs a live auction. The first step is that Google tries to identify which advertisers want to show an ad for this query. To do this, advertisers set up accounts with keyword targets and campaigns within a platform called Google Ads. By using keyword targets, advertisers indicate to Google which queries they want to show an ad for. Once these advertisers have been identified by Google, Google then asks all the advertisers to place their bids for a click on their ad. This is done through something called a CPC bid, or cost per click. This dictates the maximum amount that an advertiser is willing to pay for a click on their ad in the search results.

paid search auction example

In this example, we have four different advertisers participating in this auction. They have different CPC bids that range from as low as $3 to as high as $5. For this click, one thing Google is very concerned about is maintaining the integrity of its search results. They want to have a quality user experience for everyone who’s searching on Google.

Quality Score

To enforce this with their advertisers, they use a metric called Quality Score. Every single time an advertiser wants to show an impression for their ad on a specific search query, Google calculates a metric between the numbers of one and ten that assesses how qualified the experiences for their users are. This Quality Score metric incorporates many different elements of the advertising experience, including the expected click-through rate, the keyword relevance of the ad copy, and the landing page experience.

Ad Rank

Once the Quality Score has been calculated for all the advertisers, Google then takes the cost per click bid and multiplies it by the Quality Score to come up with a metric known as Ad Rank. The Ad Rank determines the order in which Google will show advertising results for these keywords.

paid search auction example

In this example, based on these calculations, advertiser B would show up first in these Google Ads results, whereas advertiser A shows up second, followed by C, and D. You’ll notice something interesting here; advertiser B is showing up first in the auction, despite having one of the lowest bids for this query, even though advertiser A is willing to spend $5 on this query, advertiser B with a $3 cost per click bid has managed to get the number one rank primarily based off of their high Quality Score for this particular query. This example highlights a few important things that you’ll want to pay attention to as an advertiser:

  • First, it highlights the importance of advertisers being very careful and selective with the queries they want to show up for in the auction.

  • Second, it shows you how your cost per click bid turns into the prices you’re paying for these advertisements.

  • And lastly, it highlights the importance of Quality Score and its impact on this process overall.

Based on the last example, one of the main things that should jump out at you is how Quality Score impacts advertiser B’s ability to rank well in those search results and get lower prices on their clicks when their ad is selected by the user. We have a video that we’ll link to here that will explain how you can optimize your campaigns to have good Quality Score metrics, which will help you rank higher and pay less for clicks.

The second thing that stands out is that you, as an advertiser, need to clearly understand how much you can afford to pay for the different clicks on certain target queries. We have an entire video dedicated to figuring out if paid search is worth it for your business that you can find here.

Be sure to check out those resources because they provide the foundational elements of what it means to perform well in Google advertising. If you can internalize this information about how the paid search auction works in your campaigns, you’re guaranteed to have better performance and even be able to edge out some of your competitors.

If you need help with your web services—including PPC and SEO, contact us to see how we can help. I hope this article has been helpful and remember to always be optimizing.

Jeff Cooper

Founder & President, Saltbox Solutions

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