AdWords – What You Pay is Not What You Bid

GoogleAdwords
via http://evananthony.com/motion/google-adwords/

Setting up an AdWords account can be a daunting task. Not everyone is willing to throw their money into the competitive world of PPC Marketing.

Whether you’re working with a small budget or a large one, bidding for a better ad placement can be tricky. After all, what you bid isn’t what you pay, and getting your ad in the number one spot depends more on the ads below you.

Before you start bidding, it’s important to understand that your ads have a better chance of being shown if your keywords and ad copy are highly relevant to your landing page and to the needs of your audience. You also want to make sure, if applicable, that you’re utilizing features such as day parting (showing relevant ads only at relevant times), geo-targeting (showing relevant ads in relevant places), and network targeting. Settings will help Google determine the best times and “places” for your ads, but that’s only a piece of the AdWords puzzle.

Once Google determines whether or not your ads will be shown, they must determine where they will show up on the page. This is where your bids come in.

Once upon a time, ad placement was determined by how much money you were willing to bid for your audience to see your ad first. Then, Google Ad Rank was implemented, altering this system. Now, what you bid is no longer what you are paying for clicks.

Ad Rank is a dimension determined by your Max CPC (bid) x Quality Score. This ultimately means that the better your Quality Score is, the more likely you are to achieve higher Ad Rank with lower CPC’s than your competitors. The higher your Ad Rank, the higher Google will place your ads. This will increase your visibility and hopefully your profits/leads. Experiment with your account to keep your Quality Score / Ad Rank high.

Your actual CPC (what you pay for your clicks) is derived from the following function:

GoogleAdwords CPC formula

Below is an example of how this system works with three ads at the top of a SERP.

GoogleAdwords table

*This chart assumes that the ad below Advertiser 3 has an Ad Rank of 11.

As you can see, advertisers with the best quality score have the lowest CPCs and often pay less for clicks than their competitors. The lower your Quality Score (and thusly, Ad Rank) as compared to your competitors, the higher your bids need to be and the higher your actual CPC is. No matter how high your Ad Rank is, it is the Ad Rank of the ad below yours  that determines what you will actually pay (in relation to your Max CPC) for clicks.

In conclusion, the higher you bid, the higher your Ad Rank and the higher your ad will be placed on the page – sometimes. If your Ad Rank is running a close race with your competitors, higher bids will give you an edge.  But remember, you can keep that bid low if you focus on your Quality Score. The better your score, the less you will likely need to bid (and pay!) for your clicks and ad placements.

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