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How Does The Google Ads Auction Work? (Updated for 2023)

Google Ads operates on an auction system, which takes place every time a user performs a search. To understand how it works, it’s crucial to break down the process into key components:

  • Keywords: Advertisers select keywords they want to bid on. These are brand names, company names, words, or phrases related to their business that they believe users will type into a search engine when looking for their products or services.
  • The Search: When someone searches on Google, the search engine determines if the query contains keywords that advertisers are bidding on.
  • The Auction: An auction is triggered if advertisers bid on keywords related to the search query. Advertisers can’t spend more than their maximum bid for their ads.
  • Quality Score: Before the auction can decide which ads to show, it needs to assess the Quality Score of each ad. Google calculates this score based on several factors, including the ad’s relevance to the search query, the expected click-through rate (CTR), and the landing page quality.
  • Ad Rank: The ad’s position on the search results page is determined by its Ad Rank, a combination of the bid amount and the Quality Score.
  • Pricing: The actual amount paid by the advertiser is calculated based on the Ad Rank of the ad below theirs and their Quality Score, plus one cent.

How The Auction Process Works

Here’s a step-by-step guide to the Google Ads auction process:

  1. Keyword Selection and Match Types: Advertisers choose keywords using:
    • Exact Match for precise targeting.
    • Broad Match for maximum reach.
    • Phrase Match for a balance of reach and precision.
    • Negative Keywords to exclude irrelevant searches.
  2. Targeting Options: Advertisers refine their audience through targeting options such as location, demographics, device, and ad scheduling.
  3. User Search and Ad Options: Upon a user’s search, Google checks for keyword and targeting matches. Advertisers have several ad format options to choose from:
    • Text Ads: Standard ad format with headlines and description lines.
    • Display Ads: Visual ads that appear on Google’s Display Network.
    • Shopping Ads: Product listings for retail goods.
    • Video Ads: Ads that run on YouTube and other video services.
    • App Ads: Promotions for mobile app installations.
    • Click-to-Call Ads: Mobile ads that allow users to call a business directly.
  4. Budget Considerations: Before entering the auction, advertisers must set their budget parameters:
    • Daily Budget: The amount an advertiser is willing to spend each day.
    • Bidding:
      • Cost-Per-Click (CPC): Advertisers can set a maximum CPC bid, which is the most they’re willing to pay for a click.
      • Cost-Per-Mille (CPM): Advertisers may opt for CPM bidding for display and video ads, paying per thousand impressions.
      • Cost-Per-Acquisition (CPA): Advertisers can use CPA bidding to pay for conversions, like sales or sign-ups, rather than clicks or impressions.
      • Enhanced Bidding Strategies: Automated bidding strategies like Enhanced CPC (ECPC) and Target CPA allow Google to adjust bids to maximize conversions within the set budget.
    • Shared Budgets: If managing multiple campaigns, advertisers can use a shared budget to distribute funds across campaigns based on performance.
  5. The Auction: Ads with matching keywords and targeting enter the auction. The format of the ad (e.g., display, text, click-to-call) is also considered in how it might perform in terms of user engagement and relevance.
  6. Quality Score Evaluation: Each ad receives a Quality Score based on landing page experience, ad relevance, and expected CTR. The ad format chosen can influence these factors, as visual or interactive ads may offer a different user experience.
  7. Ad Rank Determination: Ad Rank is calculated by the Quality Score multiplied by the maximum bid. The type of ad can affect the Quality Score, as certain formats like click-to-call might have higher engagement, leading to a potentially better CTR.
  8. Cost Computation: The actual CPC is computed. If the ad wins a spot, the advertiser pays based on the next highest Ad Rank divided by their Quality Score, plus one cent. The ad format can influence the cost efficiency, with formats like display ads possibly having different average costs compared to text ads.
  9. Ad Placement: The ads are displayed on the search results page or across Google’s networks, with positions determined by Ad Rank. Different ad formats may appear in different positions or networks—display ads might appear on partner websites, while text ads generally appear on search results pages.
  10. Post-Click Activity:
    • Landing Page: The user is directed to the advertiser’s landing page, which should be relevant to the ad and search query to provide a seamless user experience.
    • Conversion Tracking: Advertisers track user actions like purchases, sign-ups, or downloads to measure the ad’s success.
    • Cost Analysis: The advertiser evaluates the cost of the click against the user’s action to determine the return on investment (ROI).
  11. Optimization: Based on the data gathered from user actions, advertisers can optimize their ads, keywords, bidding strategy, and landing page for better performance in future auctions.

By effectively combining the suitable match types, targeting options, and ad formats, advertisers can craft a Google Ads strategy that maximizes visibility, engagement, and ROI, ensuring that their ads reach the intended audience most compellingly and cost-effectively. Continuous analysis and refinement of all the elements—keywords, ad formats, budget, Quality Score, and landing page—ensure the campaign’s long-term success and efficiency.

The result of this complex auction process is that businesses can advertise at the lowest possible costs, while searchers see the most relevant, high-quality ads. This efficiency is evident in the reported 800% return on ad spend (ROAS), where advertisers make $8 for every $1 spent on Google Ads.

By referring to the infographic, one can visually understand the intricate details and the competitive nature of the auction process, designed to provide value to advertisers and users, creating a win-win situation.

How Does The Google Ads Auction Work (Infographic)
Source: WordStream

Douglas Karr

Douglas Karr is CMO of OpenINSIGHTS and the founder of the Martech Zone. Douglas has helped dozens of successful MarTech startups, has assisted in the due diligence of over $5 bil in Martech acquisitions and investments, and continues to assist companies in implementing and automating their sales and marketing strategies. Douglas is an internationally recognized digital transformation and MarTech expert and speaker. Douglas is also a published author of a Dummie's guide and a business leadership book.

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