The ROI Revolution Blog

Introduction to Google’s Ad Auction, Part 2: AdRank and CPC

March 25, 2009

Yesterday, I introduced you to a video released by Google starring their Chief Economist, Hal Varian that explains the Google Ad Auction and Quality Score. In part one of this two part blog series, I reiterated how Google quantifies their formally elusive, Quality Score.

In today’s article, I will use the same video and guidance from our Google rep to explain how Google determines your Ad Rank as well as each advertiser’s click cost. Some of this post may make you feel like you’re back in high school math class, but bear with me. These formulas really do reveal Quality Score’s crucial role in the AdWords system and how you can spend less to get more.

AdRank:

AdRank = Max CPC x Quality Score


AdRank is the formula Google uses to assign the position of a keyword targeted ad. It is determined by multiplying the maximum cpc bid that the advertiser is willing to pay by the Quality Score of that advertiser. An ad’s position is then determined by the advertiser’s AdRank, awarding the highest position to the advertiser with the highest ad rank.

adrank2.JPG

Our example above shows how Quality Score can prohibit advertisers from simply bidding high enough to show in the top position. Even though advertiser Cameron is bidding well above all of his competitors, he will show in the fourth position due to his low Quality Score.

Determining Click Cost:

Actual CPC = (AdRank to beat/Quality Score of Advertiser) + $.01

Each advertiser only pays the minimum amount required to maintain his position.


An advertiser’s actual CPC is determined by dividing the AdRank to beat (the AdRank of the competitor below them) by their own Quality Score plus one penny. The lowest positioned ad will only pay the minimum price required by Google to show on the page.
costperclick.JPG

Here our example shows that since Cameron’s Quality Score is pretty low, he has to pay a substantial amount more to win the auction against Alison.

The Value of Quality:

If an advertiser increases their Quality Score, you can clearly see using the provided formulas that their AdRank will increase, and they will have to pay less to achieve the same or better positioning. See the example below.


In our example, advertiser Mark increased his Quality Score from 3 to 10, is able to jump to position one, over Mallory, and is able to pay $.24 less than he was paying previously for the higher slot on the page.

I hope you made it through this quick and dirty math lesson on determining AdRank and CPCs without too much of a headache. The main takeaway that I hope you see underneath all these numbers is that keeping a strong Quality Score is the key to lower costs and better positions. Improving CTR, relevance, and quality of your landing pages seems to be the ticket to AdWords success!

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