How Does The AdWords Auction Work?

Meet The Author

Name: Aimee-Leigh Prince
Position: Marketing Manager
From: Portsmouth, UK
Expertise: Social & AdWords

What You’ll Find In This Post…

  • Exactly what the AdWords auction is and how it works
  • A simple, easy to understand infographic
  • Key definitions
  • How the display auction differs from the search auction

The AdWords auction can, at times, be confusing to understand. How does my ad get chosen? What factors does Google take into consideration? What even is the AdWords auction? I get it. It’s complicated. I want to help all you PPC geniuses understand exactly what is happening  behind the scenes and how everything works. To get us started take a look at the following infographic, it’s simple, easy to follow and nails down all the main points you need to know:

adwords-auction-infographic

Pretty cool, huh? I’m hoping you now have a basic understanding of how the AdWords auction works. If you are completely new to the whole platform then some of the wording and abbreviations may not have made sense, but not to worry I have explained below:

  • AdWords: This is Google’s online advertising system where you create online ads to promote your business/services and increase either your sales or website traffic
  • Keywords: These are usually phrases not just singular words. You choose your own keywords and when a user searches the term (or something very similar) your ad may be eligible to appear. Match types are added to keywords to decide how broad or niche the user search can be to trigger a relevant response. To learn more about match types click here
  • Ads: This is what Google displays in the search results. Depending on what type of campaign you are running, either a text ad or display ad can be shown. A text ad is your standard ad for search campaigns and consists of a headline, display URL and a description. You can find out more about text ads and their character limitations here. Text ads are pretty basic but can be optimised by using ad extensions. To find out whether you should be using extensions on your ads, follow this sweet 5 minute read!
  • CPC Bid: This stands for Cost-Per-Click and is the highest amount you are willing to pay for an ad click. Often you end up paying less than your CPC bid
  • Ad Rank: This is the position of where your ad is shown in the search results. It is calculated by your CPC bid (see above) x Quality Score (see below)
  • Quality Score: This is essentially how Google determines how relevant your ad is to the user and is rated out of 10. Your quality score is based on a number of things such as ad quality, relevance, CTR and landing page experience

How does the Display Auction differ to the Search Auction?

The AdWords auction for display campaigns is very similar to the search auction, with only 2 main differences to take note of. The first is easy, you may have to pay an additional fee for ads that use audience targeting. If this happens then your CPC bid will be automatically reduced before the auction takes place. The fee will then be added to the closing auction price.

The second difference to make note of is this; incremental clicks. What the…?! That was my exact reaction when I first heard the term.  But basically it means the following:

  • Incremental clicks are the extra clicks your display ad would get if it were in first position compared to second
  • You pay what’s required to rank higher for these clicks only
  • For example, your ad may get 20 clicks being in first position whereas if it were in second position it may only receive 15 clicks
  • The extra 5 you receive from being in first position are considered the incremental clicks
  • You will only pay what is needed to rank higher for these 5
  • You still have to pay for the other clicks you receive but this will be at a lower price

Incremental clicks are a bit mind boggling, so I have tried to explain it simply below:

display-auction-table

The relative CTR of position is Google’s way of showing how many more clicks the advertiser gets from being in the position above. To keep things as simple as possible we’re going to say that all 3 advertisers have the same quality score.

So, advertiser #1 would get 4 times more clicks in the top position than if it were in the second. This means that three quarters of the clicks are incremental and the remaining one quarter are what the advertiser would have received if they were in the second position.

Remember that normally the advertiser will only pay 1p more than what’s required to rank above their competitor.

Here’s how it goes:

  • In total advertiser #1 has received 12 clicks on their ad
  • Three quarters of these clicks are considered incremental, so 9
  • The remaining one quarter (3 of the clicks) are what the advertiser would have received if they were in the position below
  • The amount advertiser #1 has to pay to be in first position is 1p more than that of advertiser #2, so £4.01
  • The 9 extra clicks advertiser #1 is gaining because they are in the first position will receive a CPC of £4.01
  • The 3 remaining clicks that advertiser #1 would have received if they were in the position below will have a CPC of £2.01
  • This is because this is what advertiser #2 would be paying to be in second position

Make sense?

Make a note that if only 1 ad is being displayed then all clicks are considered incremental.

All in all advertiser #1’s cost would look like the following:

display-auction-table

The way we worked out advertiser #1’s actual CPC is the total amount spent divided by the total number of clicks. So, to sum it up the main difference between the search and display auction is the process in which the final CPC is calculated!

I know that the AdWords auction can get pretty confusing so why not contact myself or one of the team if you would like to know more. I hope that you at least have a better, more knowledgeable understanding of how the auction works and your brain isn’t too frazzled!

Aimee Prince

The Author

Name: Aimee-Leigh Prince
Position: Marketing Manager
Email: [email protected]
Expertise: Social & AdWords