Google AdWords offers an attractive pay-per-click (PPC) advertising model that helps you get the most out of every dollar you spend on advertising. With AdWords, you pay only when an Internet user clicks your ad and ends up on your landing page.

How Google AdWords Works—The Auction Platform

Once you have created an AdWords account, you have to identify the keywords that interest you and decide how much you’re willing to spend on ads centered on them. The most relevant keyword from your account is entered into an auction together with your maximum bid and your ads.

The cost-per-click (CPC) is what you pay to Google when a user clicks on your ad. Your maximum CPC bid is multiplied with your advertisers quality score to determine which ad is shown where. The quality score is a metric that determines the relevancy of your ad to users.

Suppose there are three advertisers bidding for the same keyword. Bidder 1 has a maximum CPC bid of $3 and a quality score of 4. Bidder 2 has a maximum CPC bid of $2 and a quality score of 8. Bidder 3 has a maximum CPC bid of $7 and a quality score of 1. Google will multiply the CPC bid with the quality score to determine the ad ranking, and consequently the position of the advertiser’s ad.

So, for Bidder 1:

3 x 4 = 12 ad rank

For Bidder 2:

2 x 8 = 16 ad rank

For Bidder 3:

7 x 1 = 7 ad rank

If we sort bidders by score we get:

  1. Bidder 2 16 ad rank
  2. Bidder 1 12 ad rank
  3. Bidder 3  6 ad rank

Although Bidder 3 has made the highest bid ($7), the other two bidders rank above him or her because of their superior quality score. Bidder 1, despite his or her having made the lowest bid ($2), comes on top because of his or her superior ad score (8 compared to the Bidder 1’s 4 ad score).

How Much You Pay For Your Ads

With AdWords, you pay the minimum possible amount for the position you win if people click your ad.

The formula Google uses is:

Your CPC price = the ad rank of the advertiser ranking below you / your quality score + $0.01.

Let’s consider how the formula applies with the bidders introduced above. The bidders sorted by ad rank:

Maximum CPC bid Quality score Ad rank
Bidder 2 $2 8 16
Bidder 1 $3 4 12
Bidder 3 $7 1 7


Bidder 2 will pay an actual CPC of:

12 / 8 + $0.01 = $1.51

Bidder 1 will pay an actual CPC of:

7 / 4 + $0.01 = $1.76

Bidder 3 will pay more, and so on.

As you can see, a high-quality score helps you pay a lower CPC.

Other biding methods include CPM and CPA.