Updated: Nov 7
Now, if this wasn't such a loaded question, we wouldn't have written a whole post and made a chart about it. Still, it's better to look at the big picture before getting into the details. So, here's a quick summary:
1. Advertisers make ads that target keywords by bidding on them.
2. Google is used to execute a search.
3. If any ads target keywords that are related to the search, an auction is set off.
4. Google puts all related ads into the auction, but each account can only have one ad.
5. Then, it uses methods for Quality Score and Ad Rank to pick the winners.
6. Advertisers only have to pay when someone clicks on their ad.
Now, let's look more closely at what these methods are and how they all add up to 800% ROI.
How the Google Ads Auction Works.
It's important for everyone to know how the Google Ads auction works. People can understand why they're seeing certain ads, and marketers can see why it's important to keep their account. Here is a full explanation of how the Google Ads auction works for Search ads. We'll talk about Shopping and Display ads in the FAQs section.
1. Keywords are used to make ads by advertisers.
This is how you bid on keywords. In a normal auction, people bid on goods. In the Google Ads auction, however, advertisers bid on keywords. For example, a pet adoption service might make an ad that targets a group of keywords like pet finder, pet adoption, pet rescue, animal shelter, and more. Then, they'll tell Google how much they're ready to pay for someone to click on that ad (we'll talk more about this later).
The pool of advertisers for the Google Ads sale is made up of these ads and the keywords that go with them.
2. A user performs a search on Google.
We call this a question! Note that for the purposes of this post, queries and keywords are pretty much the same thing. The only difference is that marketers target keywords, while users type in queries.
Sometimes the query matches the keyword perfectly, and sometimes it just makes sense. So, let's move on to the next step.
3. Google searches for matches
The term for this is keyword matching. Google will look through the advertiser pool we talked about above to see if any advertisers are bidding on keywords that Google thinks are related to the search query.
Sometimes, when people look for information, there aren't any relevant keywords in the advertiser pool. But in many cases (3 billion of the 5.6 billion searches performed daily), there are results, and these results may or may not be a perfect match for the query. (We'll talk about the three different types of keyword matches in the Frequently Asked Questions.)
As an example, if the user searches for "pet adoption," Google might find that keywords like "pet adoption," "rescue shelter," "pet finder," and "buy a cat" are most related to the user's search and location. So, since there are already words in the pool...
4. The bidding starts!
This means that for each account that bids on one or more keywords that are related to the search, Google will choose one keyword per account to enter into the auction, along with the ad for that keyword for that account. Do you get it?
But since there are more than four million marketers on Google, a single ad auction could have thousands of ads, and there are only a few spots on the SERP for Google ads: three or four at the top and bottom.
How does Google decide which advertisement to show?
The best thing about the Google Ads sale is that the winner isn't always the person who bids the most. Google looks at a number of things to choose the ad that is the most appropriate and best for the user. Good news for small businesses that use Google Ads. How does Google choose?
Step 1: Quality Score
First, Google gives every ad a Quality Score between 1 and 10 based on three factors:
Relevance: How well your ad fits the searcher's needs.
Expected click-through rate: How likely it is that someone will click on your ad if it is shown, based on how well you have done in the past compared to your competitors.
How related your landing page is to your ad and how helpful the experience is for the user.
Step 2: Ad Rank
Then, Google uses the Quality Score of each ad to figure out its Ad Rank:
Ad Rank = Quality Score times the highest bid
"Rank" in Ad Rank can be a little confusing because we usually think of a rating of one as the best. But in this case, having a high Ad Rank is a good thing. You can't get a perfect Ad Rank score because it depends on how much the keyword costs.
In the case below, Sam's Quality Score is 10 and his highest bid is $2. So, his Ad Rank is 10 times 2 equals 20. Jane's highest bid is higher, but her Quality Score is only 1, so her Ad Rank is 8. She doesn't get to the top of the SERP. (Jane, it's time to raise that Quality Score!)
Step 3: Cost Per Click
The price is the last part of a sale. Pay-per-click (PPC) means that advertisers only pay when someone clicks on their ad. But this is not a set price that works for everyone. It's also not always the most the sponsor is willing to pay.
Your cost per click is equal to the ad rank of the seller below you divided by your quality score plus $0.01.
In the case shown below, Sam is number one. His Ad Rank is 20, and his Quality Score is 10. His ad is right below Mary's, which has an Ad Rank of 16. So, the real cost per click for Sam is 16/10 + 0.01 = $1.61.
Look at how this is like Pat. Pat's Ad Rank is 12, and his Cost per Click is $4.01. Even though he pays more per click and has the highest bid, he shows up two spots below Sam.
So, we can see that the highest bid is a part of the auction (since it's used to figure out Quality Score, which is used to figure out Ad Rank), but it's not the only thing that matters. In fact, Google gives lower costs per click to ads that are better.
And this is why the ROI for Google Ads can be so high: searchers only see ads that are related to their search (and that they are most likely to click on), and advertisers pay the lowest possible price for each query. Everyone wins.
More questions about how Google Ads work
Here are some Frequently Asked Questions about the Google Ads auction that will help you understand how Google ads work.
What's a keyword?
People who are interested in what you have to offer will type these terms into search tools. For example, if you want to advertise an organization that helps people find homes for their pets, you might focus on pet search, pet adoption, and dog rescue.
How many keywords should I try to rank for in each ad group?
Google says that each ad group shouldn't have more than 30 keywords, but we say that it shouldn't have more than 20. For example, an ideal Google Ads account has campaigns (Search, Display, etc.), ad groups (up to 7–10 per campaign), ads and keywords within each ad group.
The best ad group has two or three ads that all lead to the same landing page and no more than twenty keywords that they are aimed at.
How do I figure out what keywords I want to bid on?
The best way to do this is to use a keyword research tool. This will show you how many times that keyword is searched per month, how much it costs on average per click, and how popular that keyword is. You can do this with a Free Keyword Tool or by using SEMRush.
How are a term and a question different?
Both keywords and queries are terms that people put into a search engine. Keywords are the terms that advertisers try to target, while queries are the terms that people type in. Sometimes the query matches the keyword perfectly, and sometimes it just makes sense.
What does max bid mean?
This is how much you'll pay for someone to click on your ad. Google multiplies your Quality Score by your highest bid to figure out your Ad Rank, which is then used to decide if your ad will show up on the SERP or not.
How does maximum bid work with bidding tactics that are done automatically?
This is a great question, because in our example above, we thought we were using the manual CPC bidding strategy, but there are many other automated bidding strategies that work differently. For instance:
For CPM bidding, Google's eCPM technology is used to figure out the bid, which is the actual cost per 1000 impressions for both the CPM bid and the CPC bid.
For CPA bidding: When you use conversion-based bidding to hit a CPA or conversion value target, Google figures out your max CPC bids based on past conversion data to help you reach your overall goal.
Does the bidding for Google Ads happen for every search?
Nope! It all comes down to the reason for the search. It's not likely for informational searches, like "how to take care of a pet" or "how to start a pet adoption agency." But when you search for terms like "buy tennis rackets online," you will always see ads.
What's the point of match types?
You have to choose a match type when you choose keywords to use in your ads. Google Ads has:
Broad match: Google could show your ad for any search that contains your keyword or is linked to it.
Phrase match: Your ad could show up when someone looks for something that includes your keyword.
Exact match: Your ad could show up when someone looks for something that means the same as your keyword.
Google's technology changes how keyword matching works, but here's how it works now:
How good is a Quality Score?
Google Ads Quality Score can be between 1 and 10, but you don't always have to aim for 10. In fact, many marketers find that some of their best ads have "low" Quality Scores. Does this mean Quality Score isn't important? Of course not; it's just a scoring factor for ads. But it does mean that a good Quality Score for different types of terms looks different. Here's what you should try to get:
Commercial purpose keywords: 7-9
Keywords with low intent: 7
Keywords for competitors: 3+
How good is an Ad Rank?
Google Ads Ad Rank doesn't have a fixed number like Quality Score does. This is because the formula for Ad Rank is Quality Score times maximum bid, and maximum bid depends on the expected cost per click and competition for that keyword. The most important thing to know about Ad Rank is that the higher it is, the higher your ad will be on the SERP. You can raise your Ad Rank by raising your Quality Score.
How much should you charge per click in Google Ads?
This depends on your business because some are more competitive than others. According to Wordstream - paid search benchmarks, the average cost per click in Google Ads across all businesses is $3.53, ranging from $1.40 (real estate) to $8.67 (legal services).
How much does it cost to use Google Ads?
This relies on your business, your target audience, your budget, and how well your account is set up. Check out our post on how much Google Ads costs to find out how much you can expect to spend each month.
How does payment for Google Ads work?
In Google Ads, there are three ways to pay:
Automatic payment: After your ads run, you'll be charged automatically, either when you hit a certain amount or every 30 days.
Manual payment: pay before your ads run, and when you want, the ads will stop running when your payment is used up.
If you are qualified for a Google credit line, you can be billed every month.
Check out our guide to Google Ads budgets and our walkthrough of the Google Ads budget report for more information on Google Ads prices and budgeting.
How long do Google Ads take to work?
Google usually looks at your ad within 24 to 48 hours after you make it live. If your ad gets turned down by Google, you can get help from our guide on Google Ads rejections.
How do the ads for Google Shopping work?
You don't bid on keywords when you use Google Shopping. Instead, you can control your ad prices and delivery by optimizing your product feed and using negative keywords and priority settings. You can find out more about Google Shopping's priority buying here.
How do Display ads work in the Google Ads auction?
The display ad auction works in a very similar way, but it is started by "placements" or pages on Google AdSense, where website or app publishers offer advertising space to Google Ads marketers.