Understanding Paid Advertising

Paid Advertising Costs and The Searchers Intent in their query to a search engine.

Paid advertising is like an auction. I’m sure not many of you realize that or have thought of it this way.

When you are advertising you are in fact bidding against other advertisers for an action to occur – a click. Calculating how much that click will cost is an important factor to know, this is where you can get the edge on your competition.

Here is a simplified way of how paid advertising works:

There are three participants in the online advertising bidding process – The Advertiser, The Searcher and The search engine or social network offering the paid ad.

For this example, I will focus on Google Adwords as the search engine offering the ad.

There are 3 slots where a paid advertisement can occur in search results (1st, 2nd & 3rd) and there are 4+ advertisers bidding to get one of those 3 slots.

Bidders are bidding a Max Bid for – Slot 1 = $4, Slot 2 = $3, Slot 3 = $2 and slot 4 = $1.

The Bidder doesn’t have to pay the price of the bid they are necessarily making, they only have to pay the $ amount of the bid closest below theirs.

So the bidder bids the maximum they are willing to pay but if they win they only have to pay enough so that they beat the competition that had a max bid below theirs.

Then comes the complexity.

How to understand Ad Quality Score and how it impacts your Cost to Advertise:

Now to add in a layer of the complexity lets include Quality Score and how that impacts the bid amount required to win the auction.

There are 3 main components to your Ad quality scores:

  1. Primary is Click through rate (how many times a searcher clicks on your ad compared to how many times your ad displayed in search results when a search was performed by a user) –
  2. Relevancy is the secondary component (how many of those click-throughs resulted in a conversion on your website showing that it was relevant for the searcher) of quality score.
  3. Landing page quality – is the user forced to do something they may not want to in order to engage with your page – do you have popups or popunders etc. How transparent is the landing page is to the searcher and how strong is the pages relevancy to the searcher’s query, as well as its relevance to the Ad.

Then comes another layer of complexity.

How does Google determine Ad Rank:

Multiply the Bid paid * the Quality Score earned = Ad Rank

What this demonstrates is that if the quality score was 1 and you had the highest bid, your ad would not necessarily be shown because its Ad Rank would be below the other bidders Rank for their ads.

This would mean their Ads would show and yours might not, moving the other bidder’s ads all up in the results standing.

Your quality score on your landing page and in your Ad is primarily based on relevancy to the searcher’s intent and the value assigned to this can dramatically impact your cost and your positioning for your Ads.

Quality Score PPC


Advertisers actually are paying the minimal amount necessary to hold their spot, this might surprise many of you.

The price that the advertiser who wins the bid pays according to this formula below:

The Cost per Click (price) for the advertiser that has the #1 spot, is going to be the Ad Rank of the bidder below them divided by the quality score that was given to the winning advertiser.

Here are a couple of good videos for those of you who are more visual learners. The first is not the best quality video but it explains this quite simply and the second is a better quality video by far.

Google doesn’t seem to have much of a video budget 🙂

Google Chief Economist, Hal Varian – Does a simple explanation if you are more of a visual learner:

or you can watch Joseph Angelo Todaro, this video is far better quality:

Joseph Angelo Todaro