How Google AdWords Determines What You Pay

Recently I’ve come across a couple of infographics trying to visually show how Google AdWords works. If a picture is worth a thousand words, evidently it takes a few thousand words to explain how Google AdWords works.

However, I think perhaps the most mystifying part of the process is how the “auction” works.

What Is the Auction?

The Google AdWords auction determines three things:

  1. Which ads are shown on a particular search results page (whether your ad even gets displayed)
  2. How the ads will be ranked (how high up on the page your ad appears)
  3. How much each advertiser will pay for that click (what you pay whenever someone clicks on your ad)

Let’s look at each of these areas in more detail.

Which Ads Are Shown

This is the most straightforward part of the auction. First Google will look for all eligible advertisers based on keywords (match type is important here) and other targeting settings such as geographic location and time of day. Each search engine results page has as many as 15 ad spaces available. There can be up to three placed in a shaded box above the organic results, as many as 10 results on the right side and, in a recent development, as many as two more search results at the bottom of the page.

But in what order will they be shown?

How Ads Are Ranked

In the past, Google would just rank advertisers by bid. If you bid higher, your ad showed up higher.  Want to get your ad to show up even higher? All you had to do was outbid another advertiser.

It was a pure auction.

However, in their efforts to improve things for searchers, Google introduced something called Ad Rank. Ad Rank is calculated by multiplying the advertiser’s maximum bid by their Quality Score (QS). Google then ranks the ads from highest to lowest based on Ad Rank.

The following image from Wordstream shows how this would work:

adwords infographic

What Each Advertiser Pays

Looking at the image above, you’ll also see how much each advertiser would have to pay for a click. Your Ad Rank is divided by your quality score and you will pay just $0.01 more than the max bid of the next advertiser. Thus you will often pay less than your maximum bid.

Notice in the above example that the advertiser with the best quality score pays the least amount.  And as the fine point notes, the advertiser with a better quality score can actually pay less than other advertisers and have its ad appear higher up on the page.

Is Google AdWords Really an Auction?

The short answer: Not really.  Being successful with Google AdWords is more than simply raising your bid higher and higher.

While increasing your bid will usually help improve your position, quality score plays a large part in who shows up and where. This means that as a small business, you can improve your Google ad position and lower your costs by improving your quality score.  I will deal with quality score in a future post.  For now, just know that quality score is largely about making sure your ad and the page where you direct visitors, matches up to whatever searchers are looking for.

For more information about how AdWords works, check out the entire infographic.


Robert Brady Robert Brady is Senior Manager: Software, SMB, Strategy at Clix Marketing, a Google AdWord Certified Partner. Robert helps small business owners and large companies just getting started with Pay-Per-Click (PPC) get better results from their PPC advertising.

13 Reactions
  1. Robert: Thanks for the explanation of Google AdWords as an auction. How would you contrast Facebook ads with Google AdSense?

  2. Facebook ads offer much more refined targeting than AdSense advertising. However, the Facebook platform still has a long way to come on reporting and their advertiser interface. I think I may have to write a Facebook PPC post in 2012 since so many small businesses are trying to grow their Facebook presence.

  3. Thanks for the informative article. I’ve always had reservations at to whether or not I should use ppc advertising because I just didn’t understand it…so, thanks for the info. It really helps.

  4. Thanks for the explanation. I’ll look forward to the post about the quality score. I never know if I should be doing more, or understand what “more” is to make Adwords work for my business. I would love to go to a seminar to fully understand Adwords and how to make them work to the best potential.

  5. This is a great article, that many Marketers still don’t know of these changes at Adwords and are losing lots of money because of their lack of knowledge. Thanks again.

  6. This article is perfect and should be a mandatory read for all those involved in Internet Marketing or Advertising. I know of many webmasters & marketers who are clueless to these changes. Therefore they are losing A LOT OF MONEY because of it. Thanks P.W.

  7. Hi Robert,

    Thanks for sharing this. I just started a campaign with adwords but to be blunt I am not sure how the whole thing works.

  8. Jaime – PPC is great for advertising, even on a small budget. But you have to track, monitor and measure its performance.

    Sue – If you’re looking for a little AdWords training, check out and shoot me an email. I can get you a complimentary login.

    Patrick – I hope people do read it.

    Justin – Good luck with your campaign.

  9. What they never will tell you is how they determine “quality” in an ad. Even if they tell you – they will arbitrarily determine one ad has superior quality to another – just as they do with page rank. Yes some formula’s apply, but it is not just based on formulas.

  10. We have been doing many experiments with landing pages that are optimized well for a specific keyword for organic searches AND PPC. It seems that it does lower the cost significantly if the landing page is optimized well.

  11. Quality Score is such a mystery… black magic that its definition is full of contradictions once you really get into it.

    Google says your quality score is BAD, pay more. Often it doesn’t make sense regardless of how much they explain.

    Two keywords in the same theme go to the same landing page: one’s quality score is “Good” the other is “Poor”. There will always be a way to rationalize this but the truth is that no one know and it could be a “glitch”.

    Its like when a clients with $45 cost per click ends up with 200% click through rates… doesn’t make sense but when questioned you get a canned dead-end response which makes it harder to defend Adwords viability to the client.

    I LOVE Adwords, think they really help businesses, and don’t mean to sound against them, but there are some things that just seem “off” with no good answer to be found.

  12. Very interesting equation. I never would have considered using the person below me on Adwords to be so determinative in what I pay per click. Hmm I’ll have to do a review of my current ads.