Google Ads is an auction where quality plays a big role
For starters, it's good to know that whoever pays the most does not automatically get to the top. Google Ads works on an auction principle where the quality score along with the maximum cost per click (the "max CPC") determine which ad position you get. The quality score depends, among other things, on the relevance of your ad, which is determined by:
- the user's search query;
- The keyword on which the advertiser is bidding;
- the ad text;
- landing page to which the ad links.
So it may be that the ad in position 1 has a lower cost per click than the ad in position 2. You determine the maximum you want to bid on a particular keyword (the maximum CPC), but the auction principle of Google Ads ultimately determines what you will pay per click. In most cases, the actual CPC is lower than the maximum CPC you bid.
Ad Rank determines who is at the top
Ad Rank is also called ad rank in the Netherlands. This value determines at which position your ad will appear. The Ad Rank is calculated by multiplying the quality score (KW score) of a particular keyword by the maximum cost per click set for that particular keyword, i.e.:
The formula = KW score x maximum CPC = Ad Rank
This is the quality score
Google Ads assigns a quality score to each keyword you bid on. This scale runs from 1 to 10 with 10 being the best KW score. Based on this, Google Ads tells you how relevant Google thinks the keyword is with respect to the ad copy and the page the ad links to.
A Google Ads example
Using an example, I'll show you how Google Ads determines your cost per click. The KW scores and maximum CPCs I'm going to use are fictitious.
Case: All four advertisers bid on the exact keyword [vacation home booking]. In this diagram, you can see how the Ad Rank is determined and how the Google Ads auction might go.
| Position | Advertiser | Max. CPC | KW score | AdRank |
|---|---|---|---|---|
| 1 | HappyHome | € 2,00 | 10 | 20 |
| 2 | Ardennes-etape | € 4,00 | 4 | 16 |
| 3 | Bungalow specials | € 6,00 | 2 | 12 |
| 4 | Casamundo | € 8,00 | 1 | 8 |
As you can see, HappyHome is at the top even though this organization does not offer the highest CPC. This is due to its maximum quality score of 10/10.
This is the CPC formula
Actual CPC = Ad Rank of advertiser one position lower / your quality score + €0.01.
Look at the example:
In our example, this amounts to the following:
| Position | Advertiser | Max. CPC | Ad Rank | Formula | Actual CPC |
|---|---|---|---|---|---|
| 1 | HappyHome | € 2,00 | 20 | 16 / 10 + € 0,01 | € 1,61 |
| 2 | Ardennes-etape | € 4,00 | 16 | 12 / 4 + € 0,01 | € 3,01 |
| 3 | Bungalow specials | € 6,00 | 12 | 8 / 2 + € 0,01 | € 4,01 |
| 4 | Casamundo | € 8,00 | 8 | ? / 1 + € 0,01 | Highest CPC |
Already have a KW score of 10/10 and the ad is not at the top? Then there's only one thing you can do: Increase the maximum CPC. Optimization to the KW score is finite, but you can always increase the CPC.
Can the competitor influence your CPC?
Yes! To give a good example, we are changing two things. HappyHome's maximum CPC becomes €2.10 and Ardennes-etape's quality score improves from 4 to 5. This then becomes the new situation:
| Position | Advertiser | Max. CPC | KW score | AdRank |
|---|---|---|---|---|
| 1 | HappyHome | € 2,10 | 10 | 21 |
| 2 | Ardennes-etape | € 4,00 | 5 | 20 |
HappyHome is going to pay €2.01 per click for position one and thus no longer €1.61 as in the old situation (20 / 10 + 0.01 = €2.01 instead of 16 / 10 + 0.01 = €1.61). It also works the other way, of course. You can also suddenly start paying less for your CPC. Suppose the competitor makes changes that don't benefit your CPC score, or lowers the maximum CPC, you're going to pay less if you were in position one.
Does a lower CPC also lower your actual CPC?
Yes, not on exact keywords. Suppose HappyHome first had a maximum CPC of €3 and has now lowered it to €2.10, the actual CPC remains €2.01. This adjustment would only reduce the Ad Rank lead on this exact keyword. Lowering the default maximum CPC on broad keywords or word groups will lower the average CPC though.
What happens at equal Ad Rank?
Ad Rank can end up equal in several ways. When two advertisers have exactly the same KW score and bid the same CPC for example, or the outcome of the multiplication between KW score and CPC is equal (5 x 4 and 4 x 5 is 20 for both). In that case, other factors also come into play, such as the CTR of the ad and the history of each person's account.
Why the € + 0.01?
Google says, "This is because the Google Ads auction allows you to pay only the minimum amount necessary to maintain your ad position." This is the case when you have an equal Ad Rank. So you need that €0.01 to rank above the other.
Other interesting facts
- New Google Ads accounts and the keywords being bid on start with a KW score of 6/10 by default;
- With each search, Google Ads recalculates Ad Rank;
- Do you have a KW score of 3/10 or lower? Then your ads on that keyword will be displayed less. Google prefers not to show an ad that the search engine believes is not relevant to the user;
- If you have a good account history, you will reach the maximum KW score faster when adding new keywords;
- The other way around works the same way. Have you been a poor advertiser in terms of relevance in the past? Then you will have to put more effort into improving KW scores. In many cases, setting up a new Google Ads account can be a cheaper option in the long run;
- It varies by industry/keyword in what time frame the maximum KW score can be achieved and the difficulty of doing so;
- The history of KW scores for each keyword cannot be retrieved in Google Ads. The score you see is the score at that time. If you want to start improving these, write down all the scores in an Excel document with the date and compare them in a while. There are also automated scripts for this;
- You cannot find out the KW score per keyword, the maximum CPC and therefore the competitor's Ad Rank;
- If you have a KW score of 10/10 AND you are not at the top of the list on a particular keyword, you can be sure that the competitor has set a higher maximum CPC than you;
- The data feed for Google Shopping and others also has a quality score. This, unfortunately, cannot be retrieved, but Google has confirmed it;
- Bing Ads works 95% identically.
Conclusion
At any time of the day, there can be big swings without you as an advertiser even changing your campaigns. How fierce this dynamic is depends on the industry in which you operate. At the end of the year, for example, health insurance ads fluctuate sharply, where the battle around the keyword "clothing store Wijchen" is a lot quieter throughout the year. By optimizing the KW score, you can realize serious savings on the actual CPC in the long run. That the KW score is of such importance is a good thing. It forces advertisers to advertise relevantly and thus positively influence users' overall Google experience. For Google, this simply means that users are increasingly clicking on ads, which generates revenue as opposed to organic clicks.
Your competitor is not sitting still, and I hope neither are you
Google Ads optimization is an ongoing process. Every year Google Ads makes major changes, and they have been announced again for this year and next. The last major update to Google Ads was, of course, that from now on four ads will be shown at the top of the page. Such changes can work to your advantage but also to your disadvantage.
Get in touch
We at Tomahawk make sure these changes work to your advantage. We are happy to take control of your Google Ads account and together ensure the best results at the lowest possible CPC. Wondering how we do that? Schedule a meeting with us. It costs nothing, so what are you waiting for?
