An auction is triggered when advertisers are bidding for keywords that are relevant to a user’s search query.
In the auction, ads are ranked based on a metric referred to as Ad Rank, which is based on the maximum CPC (cost-per-click) bid and the ad’s quality score.
Ad Rank = CPC bid × Ad Quality
The Ad Rank determines which ads are shown, the order they will appear, and how much they will cost.
There are three components to the quality score, and the biggest by far, is the click-through-rate (CTR). In computing this component’s score greater weight is given to the recent history of the site’s CTR on Google.com.
The CTR is the means of incorporating users’ feedback to the Ad Rank. Incidentally, since advertisers pay for clicks, it also maximizes Google’s revenue.
Relevancy is the next largest component. It is important because relevant and useful ads enhance users’ experience. The third component is the landing page quality.
How much does an advertiser actually pay?
To answer this question, let us suppose an advertiser, A1, secures a position on a bid of $ 2.50 and an ad quality score of 10.
And suppose, the next highest bidder, A2, bids $5.00, with an ad quality score of 4, and the resulting Ad Rank of 20 (5.00 × 4).
A1 beats A2 because its Ad Rank of 25 (2.50 × 10) is greater than A2’s Ad Rank.
Google charges advertiser A1 the minimum amount required to secure the position. Base on the above metrics, A1 would match A2’s Ad Rank of 20, with a bid of $ 2.00 (20 ÷ 10):
Ad Rank to match = A2’s Ad Rank = $5.00 × 4 = 20.
Bid required by A1 to match A2’s Ad Rank = 20 ÷ 10 = $2.00.
If there is no competing bid, advertisers pay what Google refers to as the minimum CPC. This amount, which is assigned to each keyword in the advertiser’s account, is dependent on the CTR, the account’s quality score, the quality of ad copy and landing page, and relevancy factors.
For the practitioner, a key question is how much to bid.
Besides considerations such as affordability and expected return on advertising spend, the advertiser should refer to industry benchmarks.
The average cost per click on Google Ads vary substantially by keyword and industry. Based on benchmarks compiled by WordStream, the average cost per click is roughly $2.32 on the search network, and $0.58 on the display network.
(Google Ads Bidding Process — See this video for an explanation of how the auction works, by Hal Varian, Google’s chief economist).
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