How Does Google Ads Work?

How Does Google Ads Work?

If you want to increase your online revenue by advertising on Google Search, you should know how the system works. If you already know everything about the auction, Ad Rank, Quality Score and Actual CPCs, you can skip this. If not, start reading!
How Does Google Ads Work?
Image: How Does Google Ads Work?
Behold the enormous power of the world’s largest search engine and the second largest tech company in the world: Google (part of Alphabet). As of January 2020, Google receives 80.000 searches per second on any given day. This translates into 4.8 million searches per minute, 288 million searches per hour, 7 billion searches per day and at least 2.5 trillion searches per year! Read that again.
Keywords
Image: Keywords
With Google Ads, you have the possibility to CHOOSE YOUR KEYWORDS. So you can target and reach your ideal customer at the moment they are searching for your products, how great is that?! It’s perfect to attract highly interested visitors who are actively searching for your products!

In short, Google is a search engine which returns relevant results based on users’ search queries.
  1. A user performs a search. The word(s) they type in is known as a search query.
  2. Based on the query, Google determines the most relevant content to show on the Search Engine Result Page (SERP). There is no one-size-fits-all SERP. The SERP for a more general, informational search like “former presidents of the United States” will look a lot different than a search for a commercial query like “Nike Air Max sneaker”. However, the SERP for someone searching for Adidas sneakers will look somewhat similar to the one with Nike, since both are “commercial” queries.
  3. If one or more advertisers (companies) are bidding on keywords that Google thinks are relevant to the search query, an auction is triggered.
To be clear: the search queries of users will be matched with the keywords of advertisers.
Google Ads Auction
Image: Google Ads Auction
The moment Google determines the search query can be matched with relevant ads, a super fast auction is started and finished in milliseconds. The steps are:
  1. Advertisers have already identified keywords they want to advertise with, how much they are willing to spend and have created ads for those keywords.
  2. Google enters the keyword from your account it deems most relevant into the auction, together with the ad and associated bid.
  3. Google determines the Ad Rank (position in the SERP) per Ad of the different advertisers.
  4. Google shows the user the Ads in a specific order.
I bet you wonder: “How does Google determine which ad is shown on #1?” If you thought: “however is bidding the most”: you are wrong (thankfully). Google mainly looks at two key factors to determine the Ad Rank:
  • Maximum Bid
 (a.k.a. CPC Bid or Cost-Per-Click)
  • Quality Score (QS)
So Ad Rank = CPC Bid x Quality Score, the higher the better. If you are able to increase those, your Ad will possibly get a higher position. The higher the position, the more clicks you usually receive. Somewhat counterintuitive, 1 is higher and better than 3 in this case. An Ad Position of 1 means your Ad is the first Ad users will see, it’s higher up in the SERP than position 2 or 3.Let’s look at the first two factors of Ad Rank. Firstly, the CPC Bid speaks for itself. This is the amount an advertiser has set per keyword as the maximum they are willing to pay. So this is something you as an advertiser can control.

Secondly, Quality Score, this is a metric to determine how useful and relevant your ad is to the user. This will be calculated by Google. It looks at three aspects:
  • Ad Relevance
. Does you Ad resonate well with the search query of the user? Are they about the same thing?
  • Expected Click Through Rate (CTR)
. Based on data available to Google, it estimates how often someone who sees your Ad will click on it. Normally you calculate this yourself by dividing clicks by impressions (2,000 impressions with 100 clicks is a CTR of 5%)
  • Landing Page Effectiveness. This part determines how effective your landing page is. An important part of a user’s experience is what happens after someone clicks on the Ad. Is it what they expect or something completely different? How well does it match with the user’s intent? If the landing page is extremely slow or is about a totally different subject, you will have a very poor landing page score.
An important thing to note is all of the above scores are rated relatively by Google. Meaning Google will look at all advertisers competing for the same keyword and then determine the best overall Ad. It will grade all three aspects as Below Average, Average or Above Average.

A third aspect Google looks at is the impact of your extensions. Extensions are pieces of information which can enrich your Ad, such as sitelinks, promotions and highlights. This is also an important aspect of Ad Rank. However, since a lot of accounts we see struggle to even get a QS higher than 5, we focus on the first two for the purpose of simplicity.To clarify how the Google Ads auction works, here are some examples.

Scenario 1

Google Ads Auction Scenario 1
Image: Google Ads Auction Scenario 1

Although Advertiser 1 bids the most, the QS is only 2 which means they actually have the lowest Ad Rank. Advertiser 4 has the highest QS with 6 but the bid is too low to gain a top 2 position.

This leads to the following order:
Google Ads Auction Scenario 1 Order
Image: Google Ads Auction Scenario 1 Order

As you can see, although Advertiser 1 is bidding the most, based on their Ad Rank they have the lowest postion. If Google is going to show only three ads, their ads won’t even show. Advertiser 2 takes the top position, mainly because of their relatively high CPC, followed by Advertisers 3 and 4.

Scenario 2

Let’s say Advertiser 4 is on a tight budget but wants to reach a higher Ad Position without spending more. Luckily, they partner up with online marketing specialists for retailers (hello  ) to improve their Quality Score. They see possibilities to increase the QS and are able to increase it to the maximum score of 10.

As a result, they now claim the top position with the lowest bid:
Google Ads Auction Scenario 2 Order
Image: Google Ads Auction Scenario 2 Order

That’s it, now you know how the Google Ads auction works! By the way, did you know that you don't necessarily pay the amount you set as the maximum CPC? Read the article How Much Does Google Ads Cost? for an explanation!

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If you're interested in Google Ads, first ask yourself these questions:
  • Do you know enough about it?
  • Do you know what to do and where to start?
  • Is Google Ads suitable for your business and budget?
  • Are you confident you can do it yourself without wasting money?
  • Do you know what to do if the performance is not what it should be?
  • Are you willing to regularly invest your time and money to maintain your Ads account?
And this the point where most business owners usually say:
"Never mind! I don't know all that, I can't do it by myself."
Well, I have good news for you! We actually developed a program called Ultimate Google Ads Profit Program where we teach business owners how to be successful with Google Ads. We focus primarily on online store owners but the principles in the program apply to other businesses as well. If you think it's expensive, think again! Check out the page for more info.

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