Google AdWords is the system that manages the Sponsored / Pay Per Click listings on the Google Network. Through Adwords, you are able to pick the keywords that you would like show up for on Google via a dynamic bidding system & show up in the sponsored area (along the top and side) when people type them into the Google Search Engine.
Many people believe that your position in the sponsored listings is driven exclusively by your bid price or that you can "Buy your way to the top". That is not the case. There are actually several variables that come into play in addition to bid price to determine where your ad will appear in the sponsored listings:
- Max Bid Price - this is the max bid for a given search term - set by you
- Quality Score - is determined by Google based on a number of variables
- Click Through Rate (CTR)
- Relevance
- Quality of Landing Page
- And Others
Google has defined "Quality Score" in their support system as "A dynamic metric assigned to each of your keywords. It's calculated using a variety of factors and measures how relevant your keyword is to your ad group and to a user's search query. The higher a keyword's Quality Score, the lower its cost-per-clicks (CPCs) and the better its ad position."
Your Max Bid Price X Quality Score = Your AdRank
AdRank is the position in which you will appear in the listings.
Here is an example of how you Google determines your AdRank:
Max Bid X Quality Score = AdRank Rank
Advertiser 1 $4.00 1 $4 X
Advertiser 2 $3.00 3 $9 2
Advertiser 3 $2.00 6 $12 1
Advertiser 4 $1.00 8 $8 3
So in this example, the advertiser bidding $2.00 per click with a 12 quality score actually ranks #1 and the advertiser bidding $4 does not even show up in the top three listings because his quality score is too low.
The next questions is, how is your Cost Per Click determined:
With Google, you only have to pay as much as the maximum bid of the bidder directly beneath you in the bidding auction.
Google has a formula that is written as P1 = b2q2 / Q1 - Ultimately it is AdRank of advertiser below / quality score of advertiser 1.
So even though advertiser 1 bid $4.00 he is only paying $3.00 per click.
By increasing your Quality Score you can actually reduce your Cost Per Click and improve your position in the sponsored listings.