How Does the AdWords Auction Work?

( How Does the AdWords Auction Work? PRIZED AUCTION ITEMS TOTAL GOOGLE EARNINGS $32.2 BILLION "Insurance" in advertising revenue. "Loans" That's %24 %A &s "Mortgage" 97% "Attorney" of Google's total revenue! IT ALL STARTS WITHA QUERY When someone searches for something on Google, Google looks at the AdWords advertisers pool and determines whether there will be an auction. bid! bid! search| advertisers pool If one or more advertisers are bidding on keywords that Google deems relevant to the search query, an auction is triggered. NOTE: Keywords are not search queries! Specific keywords (such as "pet medicine") may be entered into auctions for a wide range of search queries (such as "medicine for dogs" or "pet supplies"), depending on your match type. WHAT GETS ENTERED INTO THESE AUCTIONS? Advertisers identify keywords they want to bid on, how much they want to spend, and create groupings of these keywords that are paired with ads. keyword Google then enters the keyword from your account it deems most relevant into the auction with the maximum bid you've specified as well as the associated ad. NOTE:You can only have one entry into any query auction from your account. HOW DOES GOOGLE DETERMINE WHICH AD IS SHOWN WHERE? Once you are entered into the auction, Google looks at two key factors to determine where your ad ranks: your maximum bid and your quality score. AD RANK = CPC BID QUALITY SCORE The best combined CPC Bid x Quality Score gets the best position: Sgs This is a metric to determine how This is the maximum bid you specify for your keyword. relevant and useful your ad is to the user (components are CTR, relevance, and landing page). The higher your quality score, the better. KEYWORD QUALITY RELEVANCE USER EXPERIENCE SCORE AD URL Max Bid X Quality Score Ad Rank Position 20 Advertiser I $2.00 10 Advertiser II $4.00 16 SOLD! Advertiser III $6.00 2 12 Advertiser IV $8.00 HOW DOES GOOGLE DETERMINE WHAT YOU PAY? You pay the minimum amount you can pay for the position you win if your ad is clicked on. THE AD RANK YOUR QUALITY + $0.01 SCORE YOUR = OF THE PERSON BELOW YOU PRICE Max Bid Quality Score Ad Rank Actual CPC 16/10 +0.01= Advertiser I $2.00 10 20 $1.61 12/4 + 0.01% = Advertiser II $4.00 16 $3.01 8/2 + 0.01= Advertiser III $6.00 12 $4.01 Highest Advertiser IV $8.00 8. CPC Notice how Advertiser I can pay less for a higher position due to his high quality score. The Auction gets run billions of times each month. The results are such that • Users find ads that are relevant to what they're looking for • Advertisers connect with potential customers at lowest possible prices • Google rakes in billions of dollars in revenue OTHER AD WORDS FACTS The Ad Auction & Alternative the Display Network Bidding Methods The ad auction works very similarly, but is triggered by "placements" or pages on Google AdSense where publishers make advertising space available for AdWords advertisers. Google also allows bidding methods other than CPC such as CPM or CPA: CPM Bids - If a CPM bid is entered into an auction with CPM bids and CPC bids, eCPM is used to determine bid (the effective cost per 1000 impressions for both the CPM bid and the CPC bid). The core ranking components here are largely similar, with differences being: CPM Relevance is determined by placement rather than the query. CPA Bids - When you use Conversion Optimizer and bid to a CPA, Google is determining your max CPC bids for you based on historical conversion data, and is attempting to hit either the average or max CPC you've set. CPA Bids are set at the ad group level, not the keyword level. You may also specify CPM bids (by impression) which then compete with CPM both CPM bids and CPC bids. Sp Sources: http://searchenginewatch.com/article/2094180/Google-Reports-Q2-2011-Earnings-Reco rd-9-Billion-Revenue http://adwords.google.com/support/aw/bin/answer.py?hl=en&answer=611| http://adwords.google.com/support/aw/bin/static.py?hl=en&guide=232938&page=guide.cs http://www.youtube.com/watch?v=K71022PVHPQ http://www.youtube.com/watch?v=jRx7AMb6rZ0&feature=relmfu http://adwords.google.com/support/aw/bin/static.py?hl=en&guide=23293&page=guide.cs http://www.wordstream.com/articles/most-expensive-keywords WordStream II