How Google Ads Works?

by Nik Soni | Feb 1, 2022

How Google Ads Works

If you are thinking about incorporating PPC into your marketing strategy, you are probably thinking about using Google Ads. Google Ads is a genius platform, it gives business owners access to 90% of internet users. Using Ads, you can advertise your business next to relevant search results and target new audiences of potential customers. However, it is hard to understand what you are really paying for and why.

Google is the most used internet tool and website in history of ever. Google became Google because they show people exactly what they want to see: quality results that answer questions with reliable information, up-to-date resources, and a wide variety of websites.

The key to how Google Ads works is the Quality Score.

Quality Score is Google’s 1-10 rating of the quality and relevance of your keywords, landing page, and search ads to what a person is searching for, and how likely somebody is to click on the ad. Relevancy is really the key here. The more relevant your keywords, landing page, and ad text are to the product or service you are selling, the higher your Quality Score will be.

Google Ads Auction

Google Ads Auction is based on 3 main factors:

  1. The Quality of your Ad
  2. Your Bid
  3. The expected impact of your Bid

The quality of your ads is a way of saying quality score.

Your bid is the maximum amount of money you are willing to pay in order for your ad to show. This is also known as your Maximum CPC Bid.

The last factor is the expected impact of your ad. Ads will look at any ad extensions you have added, such as call extensions, and determine how that will impact how people interact with your ad.

Google starts an auction if the keywords are relevant and recognize which advertisers qualify for the auction. How well each advertiser competes based on his or her Ad Rank.

Google Ads Ad Rank

Google Ads Ad Rank

Google determines your rank by using this formula:

Ad Rank = Maximum CPC Bid x Quality Score

Ads are placed in order based on Ad Rank. In just a fraction of a second, Google takes all the qualifying ads and their respective bids to instantly determine which ads show and in what order on the search results page.

Ad Rank Calculation Example

The highest Ad Rank gets the top position on the page and gradually low Ad Rank comes down the page. However, advertisers with a lower bid can rank higher than a higher bidder if they have an Ad that has a higher quality score.

Download e-book: How Google Ads can grow your small business (Free Guide)

How Much Do Your Ads Cost?

The auction system is set up so that you pay the minimum amount to retain your ad position because you only have to pay 1 cent more than the ad placed under you.

This is determined by this formula:

Google Ads Cost Formula

 

For example, let us revisit the above chart.

For 1st Ad Position, the advertiser CPC will be:

Actual CPC = (24/9) + $0.01 = $2.67

For 2nd position,

Actual CPC = (20/6) + $0.01 = $3.34

For 3rd position,

Actual CPC = (18/4) + $0.01 = $4.51

Moreover, it works simultaneously for all below Ad positions. In this example, your Quality Score 9 is in the first position and pays less than the second and third positions. No matter in which position you are, you pay less than the positions below you.

Here is where it really gets interesting; the person in the top spot could actually pay LESS than the people in the spots below them. It is important that highly competitive keywords effectively increase the overall cost of the keyword because everybody is competing for it.

If you have a Quality Score 10 keyword, you control the auction.

With a Quality Score 10 keyword, you are not only paying less amount for that position, but you are forcing EVERYONE below you to pay the MOST.

How much should you pay for a click?

Let us help you determine your optimal CPC.

First, take the product or service you are trying to sell. What is the price?

Then, calculate the cost to produce, ship and sell that product. What are your costs?

Subtracting costs from price gives you your Profit or Profit margin! This is how much money you make from a sale.

Helpful Tool: Margin Calculator.

Now that we have that profit margin number, we can work towards the back to determine how much you should bid someone to click on your ad.

If you know the conversion rate of your website, you can figure out how many clicks you need to generate one sale.

The auction runs billions of times each month. The results are such that users find ads that are relevant to what they are looking for; advertisers connect with potential customers at the lowest possible prices.

However, for a successful Ad, you need to create the Best Google Ads Campaign.

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