How Google PPC advertising works?
11.09.2012 by Kristjan-Paul Raude
Google AdWords is a rather complicated advertising network that must be understood to gain value from it. AdWords enables you to reach a wide audience, bringing lots of new visitors to your site. In order to guarantee your ad appearance in search results you need to bid on keywords and have a considerable Quality Score. How exactly the ad positions are formed in Google?
How are the ad positions formed?
If someone enters an inquiry about a specific keyword Google finds out whether someone has bided on that keyword. If more than 1 bet has been made Google conducts an auction. The best results are shown on the first search page and lower results on previous pages.
Max PCP x Quality Score = actual position
Google determines the ad position by the maximum bid on a keyword and the Quality Score. This kind of system enables small businesses to compete with business leaders if their ads are superior and relevant enough. If there is more than 1 bidder the actual ad position is formed by the competitors Ad Rank. Ad Rank is calculated by multiplying the max bid with Quality Score. Ad Rank determines the average ad position on SERP page compared to your competitors. The ad with the biggest Ad Rank wins the first position.
Competitor A makes the highest bid but doesn’t get in the top 3 results which is why Google doesn’t show their ad on SERP first page. Competitor C bids half as much as A but they achieve the first position thanks to high Quality Score that brought the highest Ad Rank.
How the keyword auction works?
A company that wants to advertise on Google has to choose the keywords and bid on every keyword the maximum cost they are willing to pay. Cost per click (CPC) can be set automatically or manually. If you are a beginner automatic bidding is recommended. This way you can set daily budget for each campaign and Google gives its best to get you as much visits as possible with this budget.
More professional AdWords users bid manually. Manual bidding enables to set maximum CPC for each ad group or keyword. While setting the maximum CPC it should be considered how much a visitor costs to convert him to a client. High value visits allow you to make higher bid on a keyword. Finding the right balance is one of the key issues of AdWords.
How the Quality Score is formed?
Quality Score is calculated on a 10 points scale and it is formed in combination of several factors:
- The ad text relevancy – how relevant is the ad text for the keyword and for user search result
- The quality of a landing page – how relevant is the landing page for the chosen keyword
- Previous CTR – how many clicks the ads with the same keyword have gathered previously
- Account history – the overall CTR of the ads and keywords related to the account
High Quality Score means that your ad content and landing page are relevant to the chosen keyword. That means the ad is of high quality for the searcher. Low Quality Score means the landing page or content is not quality enough for the keyword.
High Quality Score helps to improve the way you get among the top results on Google SERP page. It also decreases the cost per click.
The objective of the Quality Score is to improve the quality of an ad so that it meets the need of a search maker. More relevant ad means higher position, more visits and business revenue.
Watch the video about how keyword auction works and how the Quality Score is calculated:
How the actual CPC is calculated?
The higher the Quality Score you have the less you have to pay for a keyword. The actual cost of a keyword is frequently lower than the maximum CPC set by the advertiser. AdWords automatically calculates the lowest price possible that guarantees the position of the competitor below you. To ensure a better position 1 cent is added to the cost.
Actual CPC = competitors Ad Rank / your Quality Score
Competitors Ad Rank is higher than your Quality Score which is why your actual CPC exceeds the maximum cost per click set. Because Google cannot charge you more than your maximum CPC rate it means your ad is not shown. To improve the situation you either need to raise your bet or make the ad content more relevant to get a higher Quality Score.
How to calculate the ROI?
A company sells coffeemakers with an average profit of 100€. On the previous month AdWords expense was 300€ and conversion 20.
ROI = profit / (Adwords expense/conversion) x100%
A: 300€/20=15€ i.e. the cost of one sale is 15€
B: (100€/15€)x100%=666% i.e. ROI is 666%
- The cost of one conversion is 15€
- ROI is 666% i.e. return on investment is more than six-fold.
Why cooperation with a Google certified partner is useful?
Google AdWords advertising is easy enough for a small company to manage with a small budget. If the budget reaches a few hundred or thousands of euros it is recommended to cooperate with Google representative. The main advantage of a Google official certified partner is high Quality Score that provides lower cost per click. Managing capacious campaigns is time consuming and requires exhaustive testing which ads work best to get better results with lower budget.
A Google AdWords qualified person is part of the WSI Online team who can make a profitable AdWords campaign for your company with lower click price.