How does Google AdWords bidding actually work?

Since its inception in 2000, Google AdWords has revolutionized the digital marketing world. Starting out with just 350 advertisers, today more than one million individual advertisers utilize the service in order to generate new business.

AdWords has undoubtedly been Google’s main source of revenue. In its last published report in 2014, they revealed their income from advertising totaled more than $62 billion.

Google says it is committed to making search as easy as possible and helping users connect with the information, brands and products they need as quickly as possible. For businesses, AdWords is an instant way to buy a snippet of Google real estate, gaining instant eyeballs and visibility.

How does Google AdWords work?

The whole system essentially starts with a query or keyword. When someone searches for something on Google, the search engine queries its advertisers looking for a keyword match within its ad groups. If one or more advertisers are bidding on the keywords that Google deems relevant to the search query, the auction begins. 

How are ads ranked?

In a nutshell, the highest ranked ad gets the first ad position. However, securing the top spot is not just a case of upping your bid. Every advertiser who has a keyword match to the search query is automatically entered into the auction. How well each advertiser does is based on their ad rank. The highest performing ad rank appears at the top, followed by the second, third and so on. Once your ad is entered into the auction, Google looks at two key factors to determine where your ad ranks: your maximum bid and your quality score, with ad ranks worked out by multiplying the quality score by the bid. 

Here's how Google explains it:

Each time an AdWords ad is eligible to appear for a search, it goes through the ad auction. The auction determines whether or not the ad actually shows and in which ad position it will show on the page.

Here's how the auction works:

  • When someone searches, the AdWords system finds all ads whose keywords match that search.
  • From those ads, the system ignores any that aren't eligible, like ads that target a different country or that are disapproved.
  • Of the remaining ads, only those with a sufficiently high Ad Rank may show. Ad Rank is a combination of your bid, ad quality and the expected impact of extensions and other ad formats.

What is a quality score?

Quality scores are the key to Google AdWords bidding system. Rated from 1-10, the quality score is Google's assessment of both the quality and relevance of keywords and adverts. The quality score essentially tells the story of how well an ad group, keywords, ad and landing page relate to what a person is searching for. As such, it shows just how relevant and useful the ad is to the user. Having a high quality score means that Google’s systems see the ad and landing page as relevant and useful – this means you can pay less than other advertisers and still get a higher ad placement than them, if your advert and keywords are highly relevant.

Google has a couple of tools in place to ensure advertisers are getting the most out of their system and seeing the best return on investment. One of the ways it does this is by providing easy to understand quality score reports as well tips for advertisers needing to increase their quality score. 

How much does Google AdWords cost?

Google AdWords is designed to be flexible in order to meet the needs of its customers. Businesses set a budget based on how much they wish to spend – this can be adjusted up, down or paused at any time. 

The more competition there is for a certain keyword, the more it will usually cost per click. Refining individual adverts, groups and landing pages can significantly decrease the amount of money required per click. Likewise, if your quality score is poor and your keyword selection, ad text and landing page are poorly related, your quality score will be lower and you will need to bid more than a well-thought out campaign would for the same spot.

What are keywords?

Keywords are the backbone of campaigns. Results can be greatly improved with better keyword research and more considered keyword groupings and organization. 

Once you have identified which keywords you want to bid on, you’ll have to set match types, decide how much you want to bid for each click, how much you want to spend overall and create keyword groups. The match type will influence the amount you spend on each keyword and can impact on how much you’ll need to bid to be visible on page one of the search results. 

Google then enters the keyword from the account it deems the most relevant into the auction, along with the maximum bid specified and the associated ad. 
It’s important to remember that keywords are not search queries. Keywords, such as ‘women’s shoes’ may be entered into the auction for a range of search queries, such as ‘formal ladies shoes’ and ‘heels for occasions’, depending on the match type. 

The default match type when you add a keyword to your AdWords campaign is Broad Match. This means your advert will show for that keyword (for example ‘women’s shoes’) as well as in user searches with misspellings, synonyms, related searches and other relevant variations of that same keyword. This type of match means you’ll get lots of impressions and target a broad spectrum of traffic. It can also mean you’ll spend a lot more as your keywords will be eligible for a wider range of searches, so keep this in mind when setting your maximum bid. Other options include Phrase Match, Exact Match and Negative Match. 

What else can Google AdWords do?

Google’s conversion tracking will help you to see how keywords are performing for you and if the cost you are paying per click is justified. A free to use system, conversion tracking helps you to determine what happens after a customer clicks on an ad, debiting your bid from that day’s budget. It demonstrates which keywords, ads, ad groups and campaigns are performing best, how much each conversion is costing you and where spend is disproportionate to keyword performance. This data will help you to make informed decisions about which keywords are working well and whether your bid strategy is generating a good ROI.