The basic concept of Google AdWords is sound enough.
You bid money to get your ad placed alongside a certain set of search results – then you pay only if someone clicks your ad.
But exactly how does the price per click get determined?
Here’s exactly how you ended up paying $6.72 rather than $6.73 for that click…
Your Ad Rank
Where your ad appears on the search results page (AKA SERP: search engine results page) is called your Ad Rank. It used to look like this:
To figure out who gets placed where, Google would take your Maximum CPC bid and multiply it by your Quality Score for that keyword (you can see this in the AdWords tool).
Suppose you were willing to bid $4 for the keyword ‘buy shoes’ and your Quality Score for your ad was 7/10. Your Ad Rank score would be 4 x 7 = 28.
Let’s say your competitor was willing to bid $5 and had a Quality Score of 5/10. Their Ad Rank would be 5 x5 = 25.
The highest Ad Rank score got #1, the second got #2, and so on and so forth for the rest of everyone competing for that search.
Notice that in that scenario the highest bidder did not get #1. The Quality Score is Google’s way of keeping the search relevant for the user – and allows bidders with a better offering but limited budget to compete.
Google’s New SERP
Like I said — that’s how it used to be. Google recently changed its SERP layout, which has changed the game for online advertisers.
Instead of having 11 chances to rank on the top page, advertisers now have a maximum of seven. Say you’re advertising your lawn mowing service. When a user searches for “lawn mowing company, their SERP now looks like this:
Notice Google has gotten rid of the siderail of ads. Now, ads only show at the top and bottom of the page. For “high commercial queries,” or queries that get searched for frequently on the web, Google may allow four ads to be displayed at the top of the page.
For other low volume queries, there will only be three.
However, Google still determines where you rank in the ads by multiplying your bid by your quality score. The only differences are your bid (potentially) and the chances your have to rank on the first paid. According to Search Engine Land, it’s too soon to tell if CPCs will rise drastically — it may not be a simple case of supply and demand.
But so far, it seems like CPCs remain pretty stable. But you should note that bidding for the number five spot isn’t what it used to be. Instead of on the side of the page, you’re now at the bottom. Keep in mind how much you really want to spend for the new positions.
Improve Your Ad Rank
Now that you know your ad rank isn’t just connected to your bid, how can you improve it? First and foremost, you can improve your Quality Score. For a detailed information on how that works, check out this post I wrote.
Secondly, you can raise your maximum bid. Your Adwords account will let you know if your bid is too low to rank on the first page. It’ll also tell you the average CPC.
Use that information, in combination with your Quality Score, to increase your bid and your ad rank,
Your Actual Cost Per Click
Figuring out your ad rank is great, but it still doesn’t answer “why did I pay $6.72 when my maximum bid was $10?”
Google does you a favor. They run a discount auction system system to keep auctions fair, sustainable, and profitable for the advertisers. Essentially, the discount system says the #1 spot pays $.01 more than what it takes to rank #2 (and on downwards through the ranks).
Google basically takes the Ad Rank score of the #2 spot, divides it by your Quality Score, adds a penny, and that’s what you pay.
It’s simple! It guarantees that you’ll never pay more than your maximum bid for that keyword – but will get the highest ranking possible as well.
Note: If you’re a visual learner, check out this awesome infographic over at Wordstream that breaks it down.