In the original Google AdWords ecosystem, Google assigned a Quality Score at auction time. An advertiser’s maximum CPC bid was multiplied by their auction-time Quality Score to determine their Ad Rank.
Present-day Ad Rank is far more complex. It factors in many new variables and, though Quality Score is no longer used at auction time, Ad Rank continues to determine the order in which ads display on the Google Search Results Page.
For the sake of simplicity in the following example, we’ll use the original Ad Rank formula of Max. CPC Bid x Quality Score to explain the auction process.
Let’s assume the following advertisers are bidding on a search:
● Advertiser A—Max. CPC Bid: $5, Quality Score: 5, Ad Rank: 25
● Advertiser B—Max. CPC Bid: $8, Quality Score: 2, Ad Rank: 16
● Advertiser C—Max. CPC Bid: $5, Quality Score: 4, Ad Rank: 20
● Advertiser D—Max. CPC Bid: $3, Quality Score: 10, Ad Rank: 30
● Advertiser E—Max. CPC Bid: $7, Quality Score: 4, Ad Rank: 28
If this ad auction were reserving four individual ad placements on this SERP, the order in which these ads would display are as follows:
1. Advertiser D (Ad Rank: 30)
2. Advertiser E (Ad Rank: 28)
3. Advertiser A (Ad Rank: 25)
4. Advertiser C (Ad Rank: 20)
For this auction, Advertiser B (Ad Rank: 16) would not show an impression. This is an interesting method of determining Ad Rank because even though Advertiser B is essentially telling Google, I am willing to pay more for this ad click than any of my competitors!, Google is still penalizing them for low ad quality and not showing their ad at all.
Through the concept of Quality Score, Google is saying that they are willing to sacrifice short-term revenue from advertisers to maintain a better experience for end users on the platform. It is also a feedback mechanism for advertisers—if your ads are of low quality and not delivering a delightful experience to Google’s users it is also likely that your ads would not be effective in driving profitable conversions.
Google often assumes the role of a parent in that they are willing to punish advertisers, with the ultimate goal of encouraging them to improve. They double-down on this idea by saying that they will financially reward advertisers with higher quality ads. This is represented by what Google actually charges advertisers when their ads are clicked on.
Actual CPC is often less than your Max. CPC bid because with the Google Ads auction, you only pay what’s minimally required to clear the Ad Rank thresholds and beat the Ad Rank of the competitor immediately below you.
The formal process for this followed this formula:
Actual CPC = (Ad Rank of Advertiser Immediately Below You / Your Quality Score) + $0.01
That is, if you run this calculation, it represents the actual bid that you would have had to use to outrank the advertiser with the next-highest Ad Rank.
In our previous example, here’s how Actual CPC would be determined for each of our advertisers:
1. Advertiser D—Max. CPC Bid: $3, Quality Score: 10, Ad Rank: 30
Actual CPC = $2.81
2. Advertiser E—Max. CPC Bid: $7, Quality Score: 4, Ad Rank: 28
Actual CPC = $6.26
3. Advertiser A—Max. CPC Bid: $5, Quality Score: 5, Ad Rank: 25
Actual CPC = $4.01
4. Advertiser C—Max. CPC Bid: $5, Quality Score: 4, Ad Rank: 20
Actual CPC = $4.01
The Actual CPC calculation for Advertiser C is using the Quality Score from Advertiser B, whose Ad Rank (16) was too low to win one of the top four positions.
Again, what you’ll find interesting here is that the advertiser in first position, the most coveted ad placement in all of digital advertising, can end up paying a smaller amount than their lower competitor counterparts.