Understanding The Google AdWords ad auction and Ad Rank

Posted by Andy Evanko

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February 17, 2015

auction_blog_resizeAs mentioned in the previous post, Google’s ad auction does not just reward the ad with the highest bid. While the amount that you bid is a certain factor, the Google auction rewards quality more than quantity. The work and time you put in to optimize your ads will yield a greater quality score and can ultimately increase more targeted impressions and a lower cost per click. The process in which Google’s auction works is quite unique but, very important to understand.

So, how is your ad rank calculated?


In a traditional auction, the highest bidder would be rewarded the highest position. In the Google auction, the bidder only has to pay as much as the bidder above them.  As an example, let’s look at three ads competing against each other in the auction illustration and their bids.

Bidder 1 bids $1

Bidder 2 bids $2

Bidder 3 bids $3

In the Google auction, bidder 3, who originally bid $3, would only have to bid $2, the bid of the second highest bidder. The bid will automatically adjust to maintain position to pay as much as the bidder above them. This guarantees the advertiser never pays more than the maximum bid they are willing to pay. The advertiser determines their maximum bid during the set-up of their AdWords campaign.

Beyond analyzing advertiser’s competing bids, Google AdWord algorithm seeks to identify the most relevant ads to the search query. The relevant factors that Google analyzes are based on the following:

  1. Expected Clicked Through Rate
    The auction systems views the popularity history of your ad’s performance. The search engine views click history as a vote for a successful ad.
  2. The Landing Page
    After clicking the ad, the page the user is sent to must further explain what the advertiser is offering in their ad.
  3. Ad Relevance
    The text in your ad must be relevant to the search query performed by the user.
  4. Ad Formats
    Enhancements that add to the information in your ad. These can be things like phone numbers, locations and client reviews.

To view a more detailed explanation of the quality score factors please click here.

These factors all determine your ad’s quality score.  The ad auction uses your ad’s quality score and your ad’s bid to rank your ad position on the search engine results page.


Now, going back to our illustration of three competing bidders and add in their additional ad factors.


 Even though bidder number three bid $3, their ad will receive a lower rank than bidder one, who only bid $1. Bidder one has a more relevant and optimized ad than bidder two and bidder three, making the bid almost a non-factor. 

In this case, the winner of the ad rank bid $1. This means that the top advertiser only has to pay the amount to maintain the top position on the page. The advertiser may have only needed to bid $0.50 to rank higher than the advertiser in position 2, so that is how much the first bidder will pay, $0.50.

Although bidder one was willing to pay $1 the click will only cost $0.50. The advertiser only has to pay the amount to maintain the position above the next bidder. This final position includes all factors in quality score and bid.

Imagine bidder two goes back into their campaign and makes some quality score improvements.  For example, changes to the landing page. Their ad rank may increase to a higher score than Advertiser one. Advertiser two will then out-rank Advertiser one. If everything else stays the same, and advertiser two only bids $0.45 then, $0.45 is the bid that is needed to rank in the first position. This is how a good quality score can lower your cost per click.

Be aware that the advertiser in the first position does not set the bid for every position moving down. If the advertiser ranked in position one bid $0.45 that amount, including their quality score, is the amount that advertiser needed to maintain their position.  The amount that is actually paid all depends on the advertiser that ranks above your ad in the ad position.

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Topics: Paid Search Marketing

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