How do auctions work in paid search?

Auctions may seem an unusual place to start a guide on paid search, but understanding how they work is critical to understanding just about every aspect of the topic. They're the fundamental mechanism which paid search operates by, and so much best practice is a direct consequence of auction mechanics.

Where do auctions come in?

Let's say you search "laptop" on Google. In the milliseconds between you making your search, and seeing the results page, an auction is held.

The auction is held between all the advertisers in the world that are bidding on laptop-related keywords, and they're competing over the right to show you their ad.

All of the ads that are entered into the auction are ranked according to a metric called ad rank, and the four highest-ranked ads are shown above the organic listings on your search results page. Ads that are ranked outside of the top 4 can be shown either below the organic listings, at the bottom of the results page, or on the following pages.

What is ad rank?

Ad rank is the metric that Google uses to determine how advertisers' ads perform in an auction. Only Google can see individual ad ranks; there's no way for advertisers to see this data directly.

Ad rank is a composite metric, which can be broken down roughly according to the following equation:

Let's go through what each of these terms mean:

Why is ad rank calculated this way?

To fully understand the importance of the ad rank equation, it's worth understanding why Google judges ads in this way.

The most important part of the equation is the product of maximum bid and ad score. The reason Google gives priority to ads with higher bids is fairly straightforward; Google is a business and it wants to generate revenue by encouraging advertisers to spend more.

Google prioritises ad score for a different reason though. Those familiar with early search engines may recall the days of irrelevant, spammy ads littering the tops of result pages. If Google didn't choose to reward 'good' ads by awarding them a higher ad rank, then we'd still find ourselves plagued with irrelevant ads all over our results page.

Google wants its users to continue using its search engine, and they seek to build customer loyalty by ensuring a spam-free search experience. Prioritising 'good' ads helps them achieve this.

What is ad score?

In the sections above I've been referring to ads with high ad score as 'good' ads, but what does this actually mean? What is ad score?

Ad score can be broken down into three constituent components:

Why is ad rank important?

Summarising the above, we can rewrite the equation for ad rank as:

The two most important components of this equation are ad relevance and landing page experience, because these are the two elements that most strongly differentiate a good paid search campaign from a bad one.

By crafting ads that are hyper-relevant to user search terms, and landing pages which offer a good user experience, you can increase your ad rank in auctions. This is important because it can help you do one of two things:

What is quality score?

If you have pre-existing familiarity with paid search, you may have noticed my use of the word 'ad score' is somewhat non-standard. Often this number is called 'quality score'.

I've purposely chosen not to use the term 'quality score', because this actually refers to something else:

Unlike ad score, which is a positive decimal number with no upper bound, quality score is a whole number between 1 and 10.

If a keyword has a quality score of 10, this means that the ads associated with that keyword tend to have extremely high ad scores in the auctions that they enter into. As such, that keyword is likely to have a low cost per click, a high position on the results page, or both. The converse is true for a keyword with a quality score of 1.

How do you see quality score?

As mentioned, quality score is visible at a keyword level in the Google Ads interface as a number between 1 and 10.

In addition, you can also see how Google rates your keyword in each of the three constituent components of quality score; expected CTR, ad relevance, and landing page experience. These are each available as columns in Google Ads, and can take one of three values; below average, average, or above average.

The values for these components are closely correlated to your overall quality score. If find a keyword with a quality score of 10, there's a good chance it has scored above average in each of the three sections which make up quality score.

How does this affect best practice?

Because quality score is so closely linked to auction performance, and auction performance so closely linked to both volume and efficiency, it should always be a priority for all paid search advertisers to improve their keywords' quality scores.

Based on the three main components of quality score, there are three main ways that an advertiser can improve their keywords' quality scores.

Increasing Expected CTR

Paid search auctions give preference to ads that are more likely to be clicked. They do this both because it leads to more revenue for the search engine (which bills advertisers per click) and because it incentivises showing ads that people actually click on, which are likely better for user experience.

To increase your keywords' expected CTRs, you simply need to increase their actual CTRs. Testing ad copy which you believe will lead to increases in CTR is a good way to get started. You might want to try including offers in your ad copy, or playing off of the wants, fears, and questions that searchers are likely to have in mind.

Increasing Ad Relevance

Increasing ad relevance, the degree to which your keywords' ad copy matches the search terms it bids on, is crucially important to a good paid search strategy. It can take time to ensure that all of your keywords are in ad groups that contain relevant ads, but it's not particularly challenging to implement and can make a significant long-term impact on performance.

I won't go into full detail on this here, as it deserves an article of its own, but campaign structure plays a huge role in ensuring that your keywords have high ad relevance. One approach to campaign structure which is particularly beneficial to ad relevance, should you have time to implement it, is Single Keyword Ad Groups (SKAGs).

A SKAG structure involves creating ad groups that contain only a single keyword. Because this creates a one-to-one mapping between keyword and ad group, and a one-to-many mapping between ad group and ads, the advertiser ends up with a one-to-many mapping between keywords and ads (rather than the usual many-to-many). This is important because it allows advertisers to precisely control which ads are shown on a particular keyword, and tailor them to ensure maximal ad relevance.

Increasing Landing Page Experience

Landing page experience is a composite measure of a number of factors regarding your keywords' landing pages. There are two major factors which make it up, and which you can affect without too much difficulty.

The first major factor is landing page load speed. Search engines like Google want to ensure a good user experience not just on their results page, but also once a user clicks off the results page. Fast load times are a component of good user experience, and so Google grants a higher landing page experience to keywords that direct users to sites which load quickly

The second factor is how relevant your landing page is to a user's query, and to the ads that you're serving. Google doesn't want to allow deceptive ads; ads which appear to advertise one thing but actually direct to a landing page about something completely different. To combat this, they give preference to ads which direct to relevant landing pages.

You can take advantage of this fact by building out landing pages that are relevant to your users' queries. For example, lets say you're advertising candles on an ecommerce store. It might be tempting to send all your paid search traffic to one catch-all landing page, showcasing all the candles that you sell. A better strategy though (resource permitting) would be to produce a unique landing page for each of your biggest keyword themes; you might have landing pages displaying candles for men, candles for women, et cetera.

Auctions: in summary

If everything above makes sense to you then congratulations, you now understand the fundamentals of how auctions work. Auction mechanics might seem like an abstract or theoretical topic, but it's important to appreciate it if you want to run paid search efficiently. Understanding auctions means understanding all of the reasons that a search engine might prefer or disadvantage your ad, and understanding these reasons means you can take advantage of them.

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