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How a Google Ad Auction Works

Updated: Jun 29

Whenever someone searches on Google, an ad auction kicks off behind the scenes to determine which ads (if any) will appear alongside the organic search results. Advertisers bid on specific keywords and phrases they reckon their target audience will use when searching for relevant products or services.

For example, if you run a sportswear shop specialising in running gear, you might bid on keywords like "best runningtrainers," "buy running shoes online UK," or even more specific terms like "Nike Air Zoom Pegasus 38 running trainers." The aim is to bid on phrases that potential customers are likely to search for when looking for what you're selling.

Google Ad auction

How Ads Get Ranked

When an ad auction is triggered, Google ranks all the eligible ads based on a calculation called "Ad Rank." An ad's position in the rankings depends on several factors:

Bid Amount: This is the maximum an advertiser is willing to pay for a single click on their ad. The higher the bid, the higher the ad will probably rank.

Ad Quality: Google also considers the overall quality and relevance of the ad when calculating Ad Rank. This includes:

  • Expected Click-Through Rate (CTR): An estimate of how likely users are to click your ad based on past data.

  • Ad Relevance: How well the ad copy matches and relates to the user's search query.

  • Landing Page Experience: The relevance, usability, and load speed of the webpage the ad sends users to.

  • Ad Extensions and Formats: Things like displaying a phone number or site links, and ad formats like product listing ads, can also impact an ad's position.

Why Quality Score Matters

One of the biggest factors in Google's ad auctions is Quality Score. This is Google's rating (from 1 to 10) of the overall quality and relevance of your ads, keywords, and landing pages.

Quality Score is based on the ad quality components above: expected CTR, ad relevance, and landing page experience. The higher your Quality Score, the less you'll need to bid to earn higher ad positions and keep costs down. A low Quality Score means you'll have to bid way more to rank well.

For example, let's say your ad has a Quality Score of 5/10 and a competitor's is 8/10. Even if you bid higher, their ad will likely rank above yours thanks to its better quality. That's why continually optimising Quality Score is crucial.

Meeting Google's Ad Ranking Requirements

To be eligible for having ads displayed, your campaigns must clear certain Ad Rank thresholds set by Google. These are based on the calculated Ad Rank from your bid, Quality Score, and other factors combined.

Essentially, Google wants to ensure only highly relevant, quality ads from legit advertisers are shown for each search. Even if you bid the most, your ads won't be allowed to show unless they meet the minimum Ad Rank criteria.

How Cost-Per-Click is Actually Calculated

You might assume that if you bid, say, £1.50 per click, that's what you'll get charged whenever someone clicks your ad. But the actual amount you pay for each click (your "actual CPC") is typically lower than your maximum bid.

This is because Google aims to keep ad auctions competitive by encouraging multiple advertisers to bid on keywords. Instead of charging you your full max bid, your actual CPC is worked out using this formula:

Actual CPC = (The Ad Rank of the ad below you / Your Quality Score) + £0.01

This ensures you only pay the bare minimum required to outrank and appear above the ad below you in the rankings, not a penny more.

For example, let's say your Quality Score is 6 and the Ad Rank of the advertiser below is 4.5. Plugging into the formula:

Actual CPC = 4.5 / 6 + £0.01 = £0.76

So even if your max bid was £2 per click, you'd only pay 76p based on that auction result.

The Outcome of an Ad Auction

After all the calculations, an ad auction determines three main things:

  1. Which ads meet the minimum Ad Rank thresholds and will be displayed on the search results page.

  2. The specific order and position those eligible ads will appear in based on their Ad Rank.

  3. The actual cost-per-click each advertiser will pay if someone clicks their ad during that auction.

A Simple Illustrated Example

To illustrate how it all works, let's walk through an example auction:

Let's say three advertisers are competing to show ads for the search "best men's running trainers UK":

  • Advertiser A: Bids £2 per click, has a Quality Score of 8/10

  • Advertiser B: Bids £3 per click, has a Quality Score of 5/10

  • Advertiser C: Bids £1.50 per click, has a Quality Score of 7/10

The Ad Rank would be calculated as:

  • Advertiser A: £2 x 8 = 16

  • Advertiser B: £3 x 5 = 15

  • Advertiser C: £1.50 x 7 = 10.5

Based on these Ad Ranks, Advertiser A would show in the number 1 ad position because their higher Quality Score gave them the edge over Advertiser B's higher bid amount.

Advertiser B would appear in position number 2, while Advertiser C wouldn't meet the Ad Rank threshold to show an ad for this search.

As for costs, if Advertiser A's actual CPC is £1, then Advertiser B would pay: Actual CPC = 16/5 + £0.01 = £3.21

So despite bidding £3 per click, Advertiser B ends up paying just over £3.20. Meanwhile, Advertiser A pays only £1 despite bidding £2 - thanks to the competitive auction dynamics.

Why This Matters for Your Business

As you can see, Google's ad auction system has a fair few moving parts that determine which ads get shown, in what order, and how much advertisers actually fork out. Bid amounts alone don't guarantee desirable ad positioning.

That's why it's invaluable for UK businesses to work with seasoned Google Ads experts. We continually test and optimise all aspects of your ad campaigns - from keyword choice, to ad copy and extensions, to landing page quality - to max out your Quality Scores.

With higher Quality Scores, we can ensure you earn prime ad positioning at the lowest possible cost-per-click. This boosts your advertising ROI and overall digital marketing results. Let us handle the auction complexities while you get on with running your business!

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