How Google Adwords Ranks Your Ads and Determines Your Cost Per Click

For most advertisers, Google Adwords is a quick and easy way to spend a lot of money on advertising with little return.

We’ve seen a lot of clients come to us after spending thousands of dollars on advertising with one conclusion: online advertising doesn’t work.

If you’re one of those people, or you’re interested in learning more about how Adwords works, read on.

What is Google Adwords?

Google Adwords is Google’s pay per click (PPC) advertising platform, allowing advertisers to bid for the chance to have their ad display when a user searches for a given keyword. If you’re not familiar with the PPC advertising model, it’s quite simple — you only pay when a searcher clicks on your ad.

PPC – A Brief History

Prior to Adwords, all PPC engines (most notably, Overture — now Yahoo Search Marketing) ranked ads on a pure auction system.  Top spot in the results would go to the advertiser who bid the most on their desired keyword.

So, if you wanted to start running ads for a particular keyword and wanted to rank in the top position, you’d just take a look at what the current top advertiser was paying and top their bid.

If the top advertiser was bidding $5.00 per click, you could come in with a bid of $5.01 and take that top spot away.  This led to a lot of time micromanaging your accounts and your competitors’ bids to maintain position.

Then Google came along and changed the game.

Adwords Turns PPC on its Head

When Adwords launched in 2000, Google introduced another mechanism for determining ad rank — clickthrough rate (CTR). CTR is expressed as a percentage and represents the rate at which users click on an ad, calculated by dividing the total number of clicks by the total number of ad impressions (ad views).

For example, if your ad had 10 clicks from 1000 impressions, your CTR would be 1%.

With Adwords, your ad’s rank was no longer determined by the “buy your way to the top” auction system alone.  Your ad’s CTR was now also a factor in how well your ad ranked, used to determine how relevant your ad was to searches.  The higher your CTR, the more relevant your ad must be to searchers, resulting in a higher rank for your ad.

With this system, you could rank higher than your competition and pay less per click.  Revolutionary.

For advertisers who didn’t spend a lot of time optimizing ads, testing and tweaking ad copy, Adwords’ new system became the bane of their advertising existence.

Adwords Quality Score Introduced

Fast forward a few years and search advertising gets more difficult for “set it and forget it” advertisers.  A couple of years (or so) ago, Google introduced Quality Score as an updated method for ranking ads, used in conjunction with your maximum bid.

Quality Score kept your ad’s CTR as a key ranking factor but also introduced a few other variables.

(from http://adwords.google.com/support/aw/bin/answer.py?hl=en&answer=10215):

• The historical clickthrough rate (CTR) of the keyword and the matched ad on Google; note that CTR on the Google Network only ever impacts Quality Score on the Google Network — not on Google
• Your account history, which is measured by the CTR of all the ads and keywords in your account
• The historical CTR of the display URLs in the ad group
• The quality of your landing page
• The relevance of the keyword to the ads in its ad group
• The relevance of the keyword and the matched ad to the search query
• Your account’s performance in the geographical region where the ad will be shown
• Other relevance factors

Some people find it quite difficult to wrap their heads around how these “quality” factors affect bid prices and ad rankings.

Instead of diving into considerable depth, trying to explain the details of how the Google Adwords Quality Score and “Ad Auction” work, I’ll let Hal Varien, Google’s Chief Economist, explain:

With all of these different factors that influence your ad performance (actual cost per click and ranking), you can see why successful PPC campaigns require a lot of thought — and a lot of testing, tweaking, and optimization.

My advice to you…  Save money and start small with your campaigns, optimizing as you go.  Or talk to an expert.

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