If you’ve run an AdWords account to manage a Pay Per Click (PPC) advertising campaign, you have probably noticed that your max Cost Per Click (CPC) and actual CPC are often quite different. Fortunately, average CPC is frequently much lower than the max CPC bid that an advertiser sets, meaning usually an advertiser will pay less than the maximum cost for a click on an online ad. This difference is caused by Quality Score (we’ll explain this in a moment) and the advertiser competition for ad position.

Let’s look at how Google determines the actual CPC in AdWords. When PPC advertising was first introduced, the bidding system was pretty transparent and it was easy to figure out how to achieve the best position – bid more than your competitors. Those days are long gone on Google AdWords. These days, your ad’s position and your actual CPC are determined through complicated algorithms designed to increase the relevancy of the ads in search results while increasing revenue for Google

The first thing we’ll need to understand is how ads are ranked through Google AdWords.

Ad Rank is not the same as an average position. Ad Rank is what is determined through Google’s ranking equation and will then determine the position of an ad in a given ad auction. The difference is that a high Ad Rank will be a higher number whereas the best possible number to see in ad positioning is 1. For example, if your ad claims position #1 in an ad auction, you have achieved the highest Ad Rank out of all competitors vying for the top ad position.

The ranking equation is pretty simple: Ad Rank = Max CPC Bid x Quality Score. Your max CPC bid defines the most you would ever possibly pay per click in the AdWords ecosystem and Quality Score is Google’s numerical value of how relevant your advertising is based on a number of factors. As we’ll later see, the max CPC is often higher than what you end up paying per click on average.

Let’s take a look at how this Ad Rank equation rolls out in an ad auction.

PPC advertising Ad Rank

In this case, we can see that neither the greatest bid nor highest quality ad wins the coveted top ad position. Advertiser 2 wins the top position here, with the 2nd highest bid and 2nd worst Quality Score of this lot of advertisers. Each time a search is conducted on Google or a Google search partner, the same process unfolds and determines the placement of ads and the cost to each advertiser if their ad is clicked. Now that we see how ads get ranked, let’s look at how Google also determined what price each advertiser would pay if their ad was clicked on by a Google user. The actual CPC equation goes like this: {Actual Ad Rank of Next Highest Bidder / Your Quality Score} + $0.01 Let’s see how this plays out with our example from earlier.

PPC Ad Rank with Quality Score and CPC

We can see that “You” have an excellent Quality Score and Ad Rank, and thus you fare pretty well, paying a low price for a click in a high position. In fact, if your ad was clicked, you’d pay over $2.00 less for that click than the ad below you. We can see that the equation Google uses to determine the actual CPC in any auction gives advertisers with an excellent Quality Score a great advantage both in how their ad is ranked, but also in how much they will pay for any given click. How great of an advantage?

Let’s try increasing your quality to 10 and see what happens:

PPC Ad Rank for PPC

“You” have now gained the 1st place ad position while paying $0.04 less per click than you did before. That’s a better position for less cost – a real incentive to make your ads as relevant as possible. There are a few limitations with these equations.

  1. Google only gives advertisers a glimpse of Quality Score on the keyword level. This means there are many layers to quality that are left undisclosed: Campaign Quality Score, ad group Quality Score, text ad Quality Score, account Quality Score etc.
  2. It is highly unlikely that you’ll ever gain information on your competitor’s bids or Quality Score.
  3. Google does not reveal minimum bid information. In fact, in a recent email exchange I had with AdWords expert Brad Geddes, he revealed that each ad in a given auction has its own minimum bid, which may or may not come into play depending on how the auction plays out.
  4. There may be hundreds of bidders on any given keyword, and we may never see all of them, even if we go further down the results, as the top results often appear on more results pages than lower quality and lower Ad Rank ads.

Knowing exactly how much Quality Score will affect your costs and ad positioning  is powerful in helping you prioritize your advertising efforts. Reviewing your Quality Score often and being vigilant with negative keywords, ad copy testing and account organization can all help bring your Quality Score up and help you take advantage of how Google ranks your ads and how they charge you for advertising. Typically, increasing your Quality Score will help increase your pay per click Return on Investment (ROI).