Introduction to the Google Ad Auction

Our Chief Economist, Hal Varian, explains the AdWords Ad Auction and how your max CPC bid and quality score determine how much you pay for a click on Google.com.

So you put your AdWords bids up to raise your Ad position, and your AdRank (position) actually falls – what’s going on?

Google’s Chief Economist, Dr. Hal Varian, demonstrates eloquently how AdRank and Click prices (CPC) are computed, and why Quality Score and Click Through Rate are so important whenever your keyword triggers your Ad to enter the Ad Auction.

The video is insightful and revealing, watch it in full at the bottom of this article.

And I now (as of today) also believe the point Dr. Varian makes about increasing bid prices and actually appearing in other auctions with lower positions as a result, although I didn’t when I first saw the video.

This afternoon I’ve just been doing some advertiser research, which involves typing a keyword, seeing what ads appear, and going through all the pages of search results carrying ads for this keyword (tents) – there were about 140 advertisers (UK).

I noticed several things, some of which I’d seen before, but which now “seem” to gel and make a bit more sense against this backdrop.

Firstly, to confirm I had actually reached the end of the advertiser results, I noticed the See your ad here » link which shows when all ads have finished, before starting over with the top AdRank ad again (rather than More Sponsored Links >> which indicates additional ads to come on subsequent pages).

When I was going through each page, sometimes I would see the same advertiser ad that I had seen on an earlier page, but now in a lower position – a different auction, presumably triggered both by me (since I refreshed the search by going to the next page), and by other users who are all searching just like me.

Some advertiser ads also had disappeared from the auction when I had visited their website, and then gone back a page to the results page carrying their ad which I had previously seen and clicked through on.

(Perry Marshall’s observation of the “search and search again” phenomenon where ads quickly disappear and change position if you repeatedly refresh your browser may also be implicated in this auction discussion).

What I think we need to consider are several points:

1. Quality Score which governs the AdRank position is computed REALTIME for every search (i.e every auction) and is therefore potentially variable, because of broad keyword expansion, CTR, different ad text being split tested, restricted campaign delivery, ad optimisation and rotation, exhausted budgets, time of day, scheduling, advertiser competition etc.

2. Since we’re talking realtime, you’ll only ever acquire data that pertains to a tiny snapshot of the whole auction activity over an instant of time – the next search that happens, or if you refresh your browser or go to the next page of results, and the auction has already changed.

3. So the best data you can ever acquire is going to be a series of averages over a specific time period, and the longer the better to avoid glitches. So it’s overall trends you need to follow, rather than snapshots which could go up and down quite a bit.

Maybe the only way to ensure maximum consistency and Impression Share (for an individual advertiser) would be to be in the happy position (with full comprehension of profitability of course) of being able to set a huge daily budget guaranteed to buy every click on the market (and then some), a high bid price to ensure consistently top position in the auction, accelerated delivery, for exact match only with a single ad.

I wonder if anyone’s ever been able to do that? (I bet they have). I’d love to see those reports!

Seems to me that sometimes we actually can expect “too much” transparency from Google, and that they have a highly automated machine which even *they* cannot fully explain all the results from, or offer reporting or tools which can help us dig deeper.

They are still developing and refining it after all. I cite the Ads Diagnostic tool which is a great (fairly) recent functionality, but why should it be a painful, time-consuming and bug-ridden process which you can’t run as a scheduled report? I expect (or hope) that will eventually appear, as many things eventually do (remember when we could not even schedule our campaigns? I go back more than 5 years with all this…)

So AdWords sometimes seems to me to be a bit more like Quantum Mechanics than we would actually prefer (by observing the experiment, you actually participate in it, and alter it without meaning to), and that sometimes we may need to go a little easier on our opinion of Google – after all, there’s no other system like it!

And this video by Dr. Varian *graphically* demonstrates how critically important Quality Score is in governing your Ad position (AdRank), and Cost Per Click.

So, not only is it important to optimise your AdWords performance through

• bid price management to individual keyword level (yes – all of them, and it’s easily done)
• “Peel and Stick” into ever smaller ad groups (I have Campaigns with thousands of Ad Groups, and they get up to 100% CTR)
• Ad Texts targeted to keywords in Ad Headlines, description lines and display urls

but now, Quality Score has to be targeted for optimisation also, and that involves your website and landing pages too.

Remember “Traffic is for Show, Conversions is for Dough”. If you’ve got a “concrete website” – you’re in serious trouble…

The top Quality Score of “10″ is now on your weekly optimisation “to-do list” …

Comments and feedback most welcome…

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