How the Google Ads Auction Works

The Google Ads auction decides which advertisers appear among the search results through a game with several rules, which determine when ads are shown and how much each one costs.

That is why it is so important for advertisers to know how the Google Ads auction works. In this article, we will walk you through it in a simple, direct way.

• What is the Google Ads blind auction?
• What is the difference between CPC and CPM auctions?
• How does Google set my CPC?
• How does Quality Score influence the Google Ads auction?
• How do I win the Google auction?
• Step #1: Have well-configured conversion tracking
• Step #2: Create good ads and keywords in your campaigns
• Step #3: Use one of Google's automated bidding strategies

What is the Google Ads blind auction?

In Google's blind auction, participants do not know their competitors' bids. Each participant gets only the following information from the channel:

• whether they won the auction or not
• if they won the round, how much they had to pay for it

On the other side, Google needs to decide which advertisers will have their ads shown.

Google also has to decide how much prominence each ad will get within Google's channel.

What is the difference between CPC and CPM auctions?

CPC (cost per click) is the amount each advertiser pays for a click on their ads. CPM (cost per thousand impressions), on the other hand, is the average amount an advertiser pays for a thousand impressions.

Google Ads offers both auction options. CPC, however, is the most common choice in Search campaigns, so we will focus this article on that auction type.

How does Google set my CPC?

Google Ads sets your cost per click based on the other people competing for the same ad slot.

For example, suppose João, Victor, and Luíza are competing in a Google Ads search auction for the term “cell phone”.

The CPC bids the three of them placed are shown in the table below:

In this case, Luíza won the auction, since her bid was the highest of all. However, the amount Luíza will pay for the click is not equal to her bid in the auction. She actually pays 1 cent more than the next advertiser in line.

In other words, Luíza will pay R$ 2.01 if someone clicks on her ad.

Victor, in turn, will pay R$ 1.01 if someone clicks on his ad, which gets shown in second position, with far less prominence than Luíza's ad.

Although all three are taking part in the auction, only Luíza's and Victor's ads will be shown, because Google sets a limit on how many ads appear for each search. This time, João will not have his ad shown.

This was just a simplified example, though. In practice, as we will detail below, Google does not use bids alone to define ad positions and how much advertisers pay per click.

How does Quality Score influence the Google Ads auction?

Beyond the bid, Google also considers Quality Score to rank the ads. This 1-to-10 score combines three components: expected CTR, ad relevance, and landing page experience.

With this metric, Google can make sure relevant ads are rewarded in the auction, while irrelevant ones are penalized.

For example, suppose João, Victor, and Luíza are competing in Google Ads once again, this time for the search term “cell phone case”.

In this more complete example, what defines the order in which the ads are shown is not the bid but Ad Rank, which comes from the auction bid combined with the Quality Score.

Because of this metric, even though Luíza's bid is lower than Victor's, her ad will appear ahead of his in the auction.

The amounts paid per click in the auction are given by the following formula:
“(Ad Rank of the position immediately below yours) ÷ (your ad's Quality Score) + 1 cent”

So, in the example we showed, Luíza will pay R$ 1.01 per click and Victor will pay R$ 0.21 per click.

In other words: the better your Quality Score, the less you need to pay per click in the auction and the more prominence your ad gets.

Today, Ad Rank weighs more factors than the example shows: beyond bid and quality, it includes the context of the search (location, device, time of day) and the expected impact of ad assets (formerly known as ad extensions). In reporting, by the way, the old average position metric has given way to top and absolute top impression share.

How do I win the Google auction?

Contrary to popular belief, you generally do not need to worry much about giving your keywords perfectly precise bids.

Google Ads itself provides tools for optimizing bids in the Google auction.

These bidding strategies should be set up to optimize a key metric for your business, such as the number of leads or your e-commerce revenue.

What matters for succeeding in the Google auction is:

Step #1: Have well-configured conversion tracking

For Google Ads to understand which keywords, segments, or bids are ideal for you, it analyzes your conversion history.

With that history, Google Ads can optimize your bids, aiming to invest in the terms and audiences that are most profitable for your business.

Step #2: Create good ads and keywords in your campaigns

As we said earlier, Quality Score plays an important role in how efficient you are in the Google auction.

That is why you should follow every best practice when creating your ads and keywords, so you pay the lowest possible price per click. On Search, the standard format today is the responsive search ad (RSA): put real care into the headlines and descriptions you give Google.

Step #3: Use one of Google's automated bidding strategies

Google Ads keeps evolving its automated bidding tools, known as Smart Bidding.

Strategies such as Target CPA and Target ROAS let you leave it to Google to set your bid for each auction.

That frees you up to focus on your digital marketing strategy.

Want to improve your efficiency in the Google Ads auction? Try the tools from Marktech.