Introduction To The AdWords Auction

Isaac Rudansky
A free video tutorial from Isaac Rudansky
Certified Google AdWords Pro |Co-founder of AdVenture Media
4.6 instructor rating • 4 courses • 203,137 students

Lecture description

In this section you'll learn about the basic dynamics of the AdWords Auction.

You'll learn about:

  • Relevancy in the auction
  • The second price auction system
  • Max CPC bids
  • How you pay for clicks
  • The effects of relevancy on cost per click
  • Understanding Ad Rank

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English Howdy adword fans and welcome back this exciting chapter where we're going to talk about understanding the adverbs auction Now this is going to be a couple of videos. There's a lot to learn specifically regarding the quality score component. If you know what quality score is excellent but I still recommend that you watch these videos to really get a deeper understanding qualis score all the different elements that quality score contains and that they account for but most importantly we want to begin with a basic broader more structural overview of how the Edwards auction works. So let's just take a look at a couple of our auction sites and these are just some bullet points that will apply to all scenarios and there are very fundamental aspects of understanding the auction. So the Edwards auction focuses on relevancy. Relevancy is a overreaching concept in Google Adwords and we're going to talk about relevancy more in the quad core video. In fact we're going to talk about everything we talk about right now in the quad core video is coming up but what do I mean by relevancy. So there's three people let's say are three entities involved in the ad was auction. You have Google you have the advertiser and you have the searcher. Google is bringing those two people together. Bridging that gap so you have a searcher. They come to Google and Google's job is to send that person to the most relevant and useful page that contains the most relevant and useful information. The answers to their question or the solutions to their problems or whatever information they're looking for and Google cares a lot about the user experience with the ads because Google is not a yellow pages . Google is not a advertising network per se. Google is a search engine Google essentially is a referral network. People come to google looking for information and we'll cover this we're going to repeat this again . Good people come to google looking information and Google's job is to send that person to the most relevant page. So Google cares about a lot about the relevancy between your and your ads. There's a few different subcategories of relevancy. First of all Google cares that the text of your ad what your ad says is very relevant to what the user is looking for. Search query to add text relevance is one of the most important most fundamental aspects of relevancy . Google wants to see the text of your ads is matching up to what the Google Person search Google for because that will give Google's algorithms a sense or an accurate sense that your ad is going to help the user. Well Google does not want is a company like Geico or a big company that has a huge advertising budget to start taking over all the different auctions because Geico takes out billboards that don't really Google's job is to just get into the consciousness of the consumer just to brand brand brand brand. So I might search for A-6 running shoes or acoustic guitars for sale online and I will be OK. Let's show an ad because there's people using running shoes and people searching for guitars are probably also looking for car insurance at some point. Let's roll in and so Google would find that very not relevant and Google would penalize an advertiser trying to show an ad for insurance on a search query for acoustic guitars. So that's something which is that the text of the ad and the query the person typed in is is a is a big factor in relevancy. Google also cares a lot about your landing page. Google wants to know how well does your landing page match up to the questions that the search was looking for. How relevant is the content on the landing page. How navigable is your site. How clear is your site how well is your site laid out. How fast does your page load. Those are all things that Google calls the user experience. Google wants to send people once they click off Google Google wants to send people to relevant websites relevant land pages. And once again not to sound repetitive but we're going to repeat this in the next videos on quality score. Google wants to make sure that that the overall user experience is very positive so Google cares a lot about relevancy and we'll see how that plays into the actual auction. Google uses a second price auction model that means that you only need to pay the. You only really need to pay the amount at the advertiser below you is bidding Plus a penny. So we'll talk about that more in a minute but just keep that in mind intersection. It's a second price auction model. Generally a typical auction I raise my hand I say OK $50 sold $50 that's not how it works in adverts with Adwords. I might raise my hand and say $50 a $50 Max CPC bid but I don't end up I don't actually have to pay the $50. In most cases I only need to pay as much as I need. To beat the advertiser below me and I'm willing to pay at most dollars that's what my biggest as my big is my bid says I'm willing to pay at most $50 and that's a bullet point here at the bottom. Another important thing is that you only pay for clicks. Now most of you know this already we've covered this before. At this point in the in the in the course I'm sure you know you do know this but impressions don't cost money. Your ad could be shown it can be displayed it could be on the search results page a million times and you won't have to be charged. You won't get charged a penny. You only pay when your ad receives a click and that's a very powerful factor in AdWords and PPC advertising in general. And a lot of aspects in Internet marketing you only pay when somebody clicks and comes to your website . That's like saying if you had a retail store you would stand outside giving people 10 cents or 25 cents just to come inside. So you only pay when somebody comes to your store comes to your website every single search triggers another auction. This might seem simple but I want you to really focus on that. Every single search triggers another live auction if there's three billion Google searches a day. There's three billion auctions providing that each of those searches is eligible for ads. A live auction means that there are a lot of light terribles. So you might be seeing data in your account your account might show you a Q Would love a quality score of a 7 out of 10 but that's not necessarily the live. Q Would love a quality score every single time a query is entered into Google and somebody hits enter . There's another live auction to your quality score might change the competitive landscape might change there might be certain advertisers during certain times of the day that aren't advertising. There might be certain advertisers that are going to advertise more aggressively during certain hours of the day and that will affect how you add. That would affect your advert and that will affect how much you're going to have to pay for a click that's going to affect your average position in the auction. So you have to keep that in mind. This is a live market. It's not two people or a team of people deciding who gets what Page who gets what slot on the page how much people pay per click. This is a live auction. Every time somebody runs a search it does happen in a fraction of a second but keep in mind it's still a live auction and there are a lot of live variables that have to be taken into account and that will affect the results of each individual auction. The last bullet point here is that the max CPC bid equals the most you're willing to pay for click not how much you're going to pay for a click it equals the most you're willing to pay for a click. That's a very important factor. That's something which is completely fundamental. It's crucial to understanding how this works so well we've been looking at the videos and the previous videos and we've been putting in that default Max CPC bid Max CPC bid is just saying this is the most I'm willing to pay for a click for this keyword. I'm not willing to pay any more. I'd love to pay less but I'm not paying any more than my Max CPC but that's how bidding works and add words but the max CPC bid is not necessarily what you're going to pay. It's just the most you're willing to pay. So those are some of the most fundamental auction sites. Now let's go ahead and take a look at how the auction actually works . OK so here we have six advertisers entering in an auction. Let's give it a keyword. So our key word for this auction is going to be let's say continuing our example Left-Handed acoustic guitars. OK so let's say that is our key word that this auction is focusing on. Now obviously it doesn't matter what the keyword is it's just an example. So we have six advertisers advertising on the search left handed acoustic guitar. We have Jack who is willing to pay $6 for a for a click Barber who's willing to pay $5 and 50 cents for a click. Paul who is Max CPC bid is $4 for a click. Max is willing to pay $3 for a click. Jill is willing to pay almost $2 90 cents a click and Tony is willing to pay a dollar for a click. Now you might ask if everybody looking. If ever if everybody is bidding on a left handed acoustic guitar keyword Why are these advertisers bidding with such a discrepancy. Why is there such a. Why is there $5 discrepancy in how much these people are willing to pay for a click. And the answer to that is these advertisers might be selling different types of left hand to acoustic guitars. So Tony who's only willing to pay a dollar for a click. He might even be selling Left handed acoustic guitar lessons. Right. And he knows that his conversion rates for a lesson are much lower. It doesn't charge that much money for a lesson and he's figured out based on discovering it profitable bidding strategy at the most that he could profitably pay for a click is a dollar. Now you might ask What is it profitable betting strategy and hold off on that for now we're going to cover developing profitable betting strategies how to take a look at your data and decide what I should bid. But we're not there yet. We're right now under just it we're just still understanding the auction and Max and Paul three and four dollars they might be selling mid-range acoustic guitars in three to six hundred dollar range. And Jack might be representing a custom sort of luthier's shop that that creates these beautiful hand-carved limited edition Left-Handed acoustic guitars and for him he is selling guitars in the three to four thousand dollar range and his numbers and his overhead has has resulted in a profitable Max CPC bid Max cost per click bit of $6 and there might be other reasons as well Jack might be willing to take a loss because he wants to get into the game and he has some investors behind him this many different factors. But inevitably we're going to see disparities like this an even greater in the auction. Sometimes competitors willing to pay so much money for click just to take the number one spot. Sometimes competitors fact find that this key word for them just doesn't simply work. Maybe the page on their website or maybe this is a peripheral product. Maybe this keyword might mean different things for different advertisers so for Tony this might be a very peripheral awareness level state. Key word for Jack this might be exactly what he actually sells and it might be a shop or buy or purchase level funnel and the buyer files so this keyword. Keep in mind. Could very possibly represent different stages of the buying funnel for each given advertiser So that's another very important thing to keep in mind. Not every keyword has the same value to every business. So we're going to see a discrepancy. But anyway. So this is what they're all willing to pay for a click. Now let's take a look at what their relevancy scores might be. So there's a lot of different factors. Like I said there's keyword level quality. There's there is relevancy between the Q and the Aztecs is really the relevancy between your landing page is the quality of your landing page one of the biggest factors in your relevancy score is your click through rate for your keywords and we're going to talk about all that we're to talk about with you. We're going to talk about how that plays out in the future chapters but let's just give everybody a relevancy score. So let's say Jack has low relevancy. OK. So Jack's relevancy is low. OK. Because you know his his ads are pretty bad. They don't match up well with the search queries his landing page loads slowly. So he's a look let relevancy score now. Google himself. They don't rate it at low medium and high. They actually give numbers to determine your quality score. And we're going to talk about that how that gets determined in a minute in the next video. Barbara might have a medium relevancy score. OK. Paul could have a high relevancy score let's say Max it is low let's say Jill is medium and let's say Tony has a high relevancy score. OK so everybody gets a relevancy score. Now the first thing that is is calculated before we start calculating cost is the number called advert ad rate is calculated by multiplying your max CPC bid by your quality score. I'm going to talk all about ad rank coming up very and get very detailed this just to give you a very broad basic overview of of Aberg. Everybody gets an advert. Now let's just say for example Jack's advert with his high bid but low quality score comes out to a 10. OK Barber gets a 12 at rank because he has a medium medium relevancy score but a higher CPC bid. Paul comes out with a 16 add rank because he has a volley has a lower body has a very high relevancy score. Max gets a six quality score. Six add rank because he has a low bid a lower bid and a low relevancy score. Jill with Jill with a low bid and a medium quality score gets a 7 and Tony gets a 13. OK now let's see what happens here. But you need to understand what ad rankings average is just simply an arbitrary number that determines the spot on the page and determines what spot on the search engine results page you get. So in this case it's very simple. Paul Lan's spot number 1. OK Tony get spot number 2. Barbara gets Puttnam three Jack spot number four. Jill get spot number five and Max with his with with Max's low relevancy and low wish bid gets nixed from the auction altogether doesn't get a spot because the last advertiser generally doesn't get a spot . We'll talk about why that isn't a second of course. So that's something which is important to understand that when there is more advertisers then the spots on the advertising paid which is usually 8 to 10. And usually there are more advertisers for most commercial intent. Keywords. The person with the lowest average doesn't get on the page. But I want you to focus on something very important and very interesting here. If you if you if you notice look at who got the number one spot Paul who wasn't bidding the highest Paul was only bidding $4. There were two other advertisers willing to pay more for a click. But Paul with his high relevancy score when spot number one. OK. Tony which is also interesting with his cheapest cheapest bid. But he since he has such a high Belden's score he wins spot number two. And Tony in spot number two will not pay more than a dollar. So his cost per click. His actual cost per click might and up end up coming up to 87 cents wall Barbara who was in position three. She has to beat. She only has to pay as much as she needs to be person in position for what is right below her which is Jack and Barbara might end up paying $5 and 30 cents. So just think about how fascinating that is. The higher the spot on the page does not necessarily mean the higher cost per click. I want to repeat that because it's extremely important the higher position on the page does not necessarily mean the higher cost of a click. In our example here this fictitious example which could very very well happen and happens very often Tony in spot number two could be paying 80 cents. While Barbara in spot number three might be paying five dollars and 20 cents. So it's very possible that the person is by number two because such a high relevancy score is paying drastically less than person in spot number one or three. So for example here we have let's see. We have Jill. Right. So Jill is getting spot number five. So she is the last in the page because she has a a combination of just a medium relevancy score and a pretty low cost per click. So she gets the last position on the pitch. But just to continue to stress we're going to get further into all this. This is very complicated stuff and I'm sure that there's a lot here that's unclear for example how does my actual cost per click to get copulated we can talk about that. And you're right. How does my quality actually get calculate. We didn't talk about that but I want to get a takeaway from all this is very broad understanding of the average auction like the the main auction insense. There's a huge focus on relevancy. You don't use as a second price auction model which means that you don't pay what your max CPC bid is . You don't automatically pay what your bid is. You pay just what you need to pay to maintain your position over the person beneath you. You pay just what you need to pay to maintain your position over the person beneath you. You only pay for clicks every search triggers another auction and your max CPC is just the most you're willing to pay. And I want you to also to start understanding the auction in this dynamic perspective where the person that ad Rinke your ad ranked number is a number which determines your spot on the page the higher the advert the higher spot you are but the higher the ad rank the higher spot does not necessarily mean the higher cost you could position to might be paying much less and position three position three could possibly pay less in position for position one could possibly be paying less than position three or four also. So it's a very very interesting dynamic auction that takes relevancy what we call quality score in the next video as well will substitute relevancy for quality score that take politics into account. And just to give you a little bit of a precursor and we did mention this already but your Agric is calculated nowadays by your max CPC bid multiplied by your quality score. So let's dive into quality score because that's going to help you understand how the auction really works in the next couple of videos. I'm going to give you more additional examples like this that show you exactly precisely how your actual cost per click is calculated. We're going to go through it. It's going to be very instructional. It's going be a long video. We're going to really dive into these topics are going to get a much much better understanding of the Edwards auction how the different numbers are calculated and how it works and what's more I'm actually to give you a little bit of a brief history of quality score and a brief history of the Edwards auction how it came to be and how it operated before the quality score era and how it changed post quality score . So that's going to be very interesting next couple of videos. Thanks very much for watching. But stay tuned and make sure to jump into the next video right away. Thanks. We'll see you on the other side guys.