Understanding Google AdWords, Quality Score And Page Rank

There’s a lot more to Google AdWords than clicks and impressions and it’s in the best interests of the Big G to make sure that the most relevant ads are showing to the right people at the right time. This means that they need to somehow encourage advertisers to target keywords that are related to whatever they’re pitching so that the user experience is as awesome as possible.

This rule of relevancy and attention to detail is the secret sauce behind the billions that flow through AdWords each month and the foundation that it’s all built on is a hybrid auction system and a strong emphasis on what Google calls quality score and ad rank. There’s not a whole lot of real-world information on how all of this works within AdWords, so I’ve decided to explain some things I’ve figured out with the ridiculous amount of time I’ve spent using the system.

First up, an overview of the hybrid auction system that Google uses to rank and display your ads next to it’s search results.

Hybrid Auction System

Google AdWords features a hybrid auction system, which means Google will not automatically reward advertisers with the highest bids the #1 position in the paid search results. Using a PPC business model, there are some who may wonder why Google would even care about the ad copy’s relevance. Doesn’t Google make the most money if they just take the highest bid and display their ad copy at the top of the results?

In the long run, if Google only rewarded advertisers who submitted the highest bids, there would be advertisers with inexhaustible budgets who would abuse this system by bidding astronomically high and displaying irrelevant ads everywhere. This would absolutely cripple Google’s search engine because users will grow increasingly frustrated by not being able to find what they are searching for. At the same time, Google will lose more money because they’re not owed a dime until a user clicks on an ad. Because a user will most likely click on an ad that that is the most relevant to the keywords she chose, Google has to heavily factor the ad’s relevance. With the hybrid auction system, Google improves search experience and makes more money because of it.

Ad Rank: Why Quality Score Matters

The way Google ranks relevance in any AdWords account is through something they call quality score. Advertisers are issued a quality score of 1-10 to determine their ad campaign’s relevance. Google will factor in a myriad of components to determine quality, such as the relationship between the keyword and the ad copy, to even searching through the content of the landing page. A quality score of 1 indicates that starkest irrelevance. On the flip-side, a quality score of 10 indicates the utmost relevance.

The quality score will affect campaign in multiple ways. Here’s an explanation from Google about quality score:
About Quality Score
A Quality Score is calculated every time your keyword matches a search query — that is, every time your keyword has the potential to trigger an ad. Quality Score is used in several different ways, including:

• influencing your keywords’ actual cost-per-clicks (CPCs)
• estimating the first page bids that you see in your account
• determining if a keyword is eligible to enter the ad auction that occurs when a user enters a search query
• affecting how high your ad will be ranked

The rest of the details can be found here.

Ad Rank / Actual CPC Formula

This is another formula advertisers can use to determine how their quality score is affecting their average CPC and ad rank:
Ad Rank = (Bid) x (Quality Score)
Actual CPC =(Ad Rank of Advertiser Below) ÷ (Quality Score)

It’s difficult to guess the actual CPC for Advertiser D, so I’ll ignore her in the following comparisons.  As we can see here, Advertiser A put in the lowest bid, but she will end up with the best ad rank, and thus, will enjoy the benefits that come with claiming position #1. Advertiser B bid $0.50 lower than Advertiser C, but will enjoy the ad position #2 because of her superior quality score, which gives her a discounted actual CPC.

It’s a little crude to assume this pace will hold up. There will be new advertisers and existing advertisers can always adjust their bids and improve their quality score. However, if this pace were to maintain, then 1,000 clicks later, Advertiser C will end up paying $440 more than Advertisers A & B for the same number of clicks. That thought should be extremely bothersome.
For those who want a more detailed tutorial of the Google Ad Auction, please refer to the video below featuring Hal Varian, Google’s Chief Economist:

One Note on Ad Rank

There’s no doubt that plenty of benefits come alongside being ranked in position #1. However, this is not to say that this is the best strategy for every single advertiser. Let me throw out a scenario – Michael, the ad rep for a small online car insurance company, decides to bid for the ultra-competitive keywords “online car insurance.” Doing a little keyword research, Michael learns that the approximate CPC for this particular keyword is hovering around $51.00. That’s not chump change. If Michael chooses to bid high to attain position #1, he will be highly susceptible to an army of click-happy, semi-serious shoppers. If Michael runs into just ten of these shoppers, that’s $510! And this could all happen in 5 minutes.

Instead, what Michael can choose to do is bid low in order to aim for the mid-section of pages 2-3 (for those who are worrying about CTR, Google will calculate the position of the ad and factor that into the quality score). The psychology behind this is that if a searcher is seriously shopping for car insurance, then there’s a good chance that the searcher will go to the 2^nd and 3^rd pages. Chances are, the conversion rate for this particular searcher will be higher than searchers who click ads on the front page.

Final Thoughts

Sometimes, it’s easy to look at the CPC, the CTR, and conversions and just disregard the quality score. But the quality score seeps into every facet of the intricate AdWords platform. Whether it’s the ad copy that needs to be tweaked, or the landing page that needs to be optimized, it’s important to take active steps towards raising that number.