Google Adwords is an auction based Pay Per Click (PPC) advertising system where you as a PPC advertiser set the maximum amount you are willing to pay for each click you receive from your advertisement placed with Google.

As an Adwords advertiser you compete in a real-time auction every time a keyword prompts your ad. Adwords is a 'Vickery' type auction. In a Vickery auction once a winner has been decided, the actual price paid is not the maximum amount bid, it is one penny more than the bid of the second highest bidder. Google Adwords adds a twist to this, as winning bidders are determined by Ad Rank not by maximum bid.

An understanding of the way that Google Adwords ranks PPC bidders to determine who has won each of the real-time auctions is essential to establishing a coherent and profitable strategy when taking part in the Google Adwords PPC Programme.

The Google Adwords Quality Score

The Google Adwords system for determining who wins the PPC auction is based upon the belief that high quality advert creatives benefit all parties involved. When the ads that Google displays match the needs of searchers the assertion is that this benefits advertisers, searchers, publishers and Google alike. They call this 'relevancy'.

Given that the winning bidder gets the highest position and the highest position gets the most clicks, the goal for you as a Google advertiser is to get the highest position for your ad at the lowest possible cost per click (CPC).

Every time a search is triggered and an auction has taken place, Google ranks the resultant ads by 'Ad Rank'. The position of each ad is based upon its 'Ad Rank'

Ad Rank = 'Maximum Cost Per Click' x 'Quality Score'

Since the 'Ad Rank' is not just the maximum amount that an advertiser has bid the highest bidder does not always win. The winning bid is based upon an additional set of elements, which together make up the Google Quality Score.

The Quality Score is the basis upon which Google measures the relevancy of your ad to users and has a major effect in deciding how much you actually pay per click. This means that to compete efficiently an Adwords advertiser must be aware of what they have to do to achieve a high Google quality score.

Exactly how Google calculates the Quality Score is unknown to us and is a closely guarded trade secret.

Google do tell us however that Quality Score is determined by a keyword's clickthrough rate (CTR), the historical performance of that keyword, the relevance of text in the ad, and other relevancy factors including the landing page of the target url.

The Google Quality Score & Cost Per Click (CPC)

Naturally the higher an ad's Quality Score, the more relevant it is for the keywords to which it is tied. When ads are highly relevant to the searcher they tend to earn more clicks and therefore achieve a higher clickthrough rate (CTR). This conveys to Google that users like what they see and are finding the ad relevant and clicking on it to find out more. A higher CTR will increase a keyword's Quality Score which in turn increases the Ad Rank. As a PPC advertiser this means that you can maintain or increase your position whilst lowering the actual cost per click that you pay.

Furthermore Google stops displaying ads for keywords that have a low Quality Score. If an ad has a low Quality Score on a certain keyword it means that users are not finding that ad relevant to their needs and Google will disable the keyword by making it inactive.

A Practical Example Of How The Google Quality Score Works

The PPC bidding system inside Google Adwords is a complicated one because we can never fully be sure of the Quality Score of competitive bids.

Making assumptions about the Google Quality Score, here is an example of how the Google Adwords system would decide who wins an auction and how much they would pay per click.

I've used 5 PPC bidders to display how it works but in reality there will be many more bidders involved in each PPC auction.

The column titled 'Actual CPC' in the table below shows how much each Adwords bidder would pay for their click following that particular auction.

           Quality Score    Maximum CPC    Ad rank    Actual CPC Noddy           3            0.55          1.7        0.34 Big Ears        1            1.00          1.0        0.81 PC Plod         1            0.80          0.8        0.41 Bill            2            0.20          0.4        0.11 Ben             1            0.20          0.2        0.01

To calculate how much each PPC bidder pays, Google first calculates the Ad Rank for each bidder. The Ad Rank is Google's Quality Score multiplied by the Maximum CPC. In the table above we have ranked the ads by their Ad Rank and we can see that Noddy has won this PPC auction and his ad will be in top position in the search engine results.

Noddy was prepared to pay Google up to a maximum of 0.55 per click but he only needs to pay 1p more than would be necessary to keep his Ad Rank above the next highest ranked bidder - 0.34. The calculation is:

'Actual CPC' = 'Ad Rank of Next Highest Bidder' / 'Quality Score of Winning Bidder') + 1p

Which in our case is:

('Big Ears Ad Rank' / 'Noddy's Quality Score') + 1p
= 0.34p

The same logic is applied to each bidder in the list, Big Ears and PC Plod, then PC Plod and Bill, etc.

In the example above you can see that because Google is rewarding Noddy because his ad is relevant, he is actually paying much less per click than his competitors Big Ears and PC Plod.

Using this formula, if all other factors remained constant, Big Ears would have to pay a whopping 1.66 per click if he wanted to move up to a postion above Noddy.

As you can see from this example any PPC advertiser that does not understand the concept of Quality Score runs the risk of paying heavily for their ignorance.