Guide To The Google Ads Auction

Last updated


Daniel Wade


July 28, 2022

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Arguably the most effective form of Pay-Per-Click (PPC) advertising is the ever-present Google search engine ad. Search engine ads provide a means whereby an advertiser can bid for ad placement in Google’s sponsored links at the top of the search results page. Advertisers connect their ads to specific keywords. When any of those keywords are entered into Google’s search engine, the advertiser’s ad displays. 

One reason this type of advertising is so popular is that the advertiser only pays when someone clicks on their ad - thus the moniker Pay-Per-Click. At a high level, this method of advertising allows the advertiser to submit a bid amount that is inconsequential relative to the benefit received by having someone click on their ad and therefore landing on their website or downloading an app. 

While the idea of constructing and launching this type of ad campaign may seem daunting, it does not need to be. PPC search engine ads can be deployed very easily. They can also, if the advertiser is so inclined, be very complex and sophisticated. If an advertiser’s needs are simple, Google has automated tools to make the process simple. If an advertiser needs to manage multiple campaigns with complex audience selection criteria and streams of data to analyze for further refinement, Google can accommodate that as well. PPC advertising can be as simple or complex as needed.


Table of contents

Ads Auction

The process by which an advertiser tells Google how much they are willing to pay to have their ad displayed in connection with certain keywords is termed an ad auction. It is the same idea as might be imagined with someone raising a paddle to indicate how much they will pay for a piece of art or some livestock. Only in this case, it happens automatically and very quickly each time someone searches using Google. The search string entered into the search engine is, whether the user knows it or not, a list of keywords to be cross-referenced against a pool of potential ads. 

There are 3 main factors in the ad auction that determine which ads appear, and in what order. They are the bid, the quality of the ad, and the ad extension. 

  1. The bid - When a bid amount is set, the advertiser is telling Google Ads the maximum amount they are willing to pay for a click on the ad. How much they actually end up paying is often less, and the advertiser can change their bid at any time.
  2. The quality of the ads - Google Ads also looks at how relevant and useful the ad and the website it links to are to the person who will see it. Google’s assessment of the quality of the ad is summarized in the ad’s Quality Score, which the advertiser can monitor—and work to improve—in their Google Ads account.
  3. The expected impact from the ad extensions and other ad formats - When the advertiser creates their ad, they have the option to include additional information on the ad, such as a phone number, or more links to specific pages on their site. These are called ad extensions. Google Ads estimates how extensions and other ad formats advertisers use will impact the ad's performance. So even if their competition has higher bids than theirs, they can still win a higher position at a lower price by using highly relevant keywords, ads, and extensions.

Together, these 3 factors determine when and if the ad will appear to potential customers.

How to Set the Bid Amount 

The question of how to set the proper bid amount is simply one of value. What is a click on the ad worth to the advertiser? Depending on the goal of the ad, the value of a click can be difficult or easy to ascertain. In a simple scenario, an advertiser is selling a five-dollar product. Through experimentation, they have learned that over a period of time 20% of people that click on their ads will end up purchasing the five-dollar item. If that is the case, each click of the ad is worth one dollar to the advertiser. If there are other costs associated with the sale of this item on their website, they would likely factor those in as well. They could reasonably bid between $0.50 and $1.00 for each PPC click. 

If, however, the goal of an ad is to generate more brand awareness for a product or service, the value of a click on their ad can be more difficult to quantify. There are plenty of theories and methods for making this determination, but in the end, they are all designed to determine how much sales will improve as a direct result of the ad.

To estimate the CPC you should look for, use this simple calculator form here:

Ad Quality

An ad’s Quality Score is an estimate of the quality of the ad, keywords, and landing pages. Higher quality ads can lead to lower prices and better ad positions. The best way to keep higher quality scores is to ensure that ads are relevant to their landing pages. Choosing keywords that are relevant to the ad and the landing page is also important. It is easy to understand why it is important to Google that advertisers use relevant keywords and that landing pages match the ad. Millions of people around the world use Google search engine ads to find products and services they need. Google has a stake in that user experience. Misleading ads that were triggered by irrelevant keywords would wreak havoc on the usability of search engines. 

An advertiser can view their Quality Score by adding that column to the report page. This score is an aggregated estimate of the overall performance in ad auctions and is reported on a 1 - 10 scale. The score includes the expected click-through rate, ad relevance, and landing page experience.


The use of proper keywords is critical to the success of PPC advertising. It can take an advertiser time to research the best keywords for their specific product or service, but it will be worth the time and effort in the long run. Keywords are, essentially, the tools that ensure the right people see the ad. 

The importance of keywords can be illustrated by considering two similar words; security and securities. An advertiser that sells security alarms, for example, would not want to include the word securities in their list of PPC keywords. Securities are a financial instrument and have nothing to do with alarm systems. The word securities would be considered a negative keyword for the security alarm dealer. If the word securities was inadvertently used by this advertiser, they could possibly end up spending additional time and effort in trying to figure out why their click-through rate was high but few people landing on their site were actually interested in their security alarm systems. They could also expect their Quality Score to be low.

A separate list of words that could indicate a search query that is not relevant to an ad should be maintained as well. Google Ads allows for the use of negative keywords, or words to be specifically excluded from an advertiser’s auction bid. 

Developing a keyword list is not a one-and-done proposition. Good keyword lists are researched, analyzed, grown, and gleaned. Advertisers are always looking to improve their PPC keyword list. The better the keywords, the more efficient the ads, and the lower the cost of advertising.

Among advertisers, there are three universally accepted desirable keyword attributes. These are relevance, exhaustive, and expansive.

  1. Relevance: Advertisers do not want to pay for website traffic that has nothing to do with their business. Driving traffic to an advertiser’s site is of no value if they are not a potential customer. 
  2. Exhaustive: Often the most popular and frequently used keywords are included in a keyword list. Keyword list development should not, however, end there. There are other more specific and less common words that can be relevant to a product or service as well. These less obvious words are also less competitive and therefore less expensive to bid on at auction. 
  3. Expansive: Through trial and error - or other forms of research, keyword lists should continually be being refined and enlarged. A quality keyword list is a precious commodity to own. 

To be successful with PPC advertising generally, and Google Ads Auction specifically, an advertiser must first determine the value of an ad click. They must learn how to keep their quality score up, and then develop a good list of keywords. The Google Ads Auction can be much more complicated and sophisticated than the simple rules discussed here. In fact, an entire cottage industry has grown up around helping advertisers negotiate these waters. Fortunately, getting a toe into the water in the form of launching that first PPC ad can be quite easy to do. There are built-in tools or third-party assistance available to meet the advertiser wherever they are on that journey to PPC success.

Guide To The Google Ads Auction


Daniel Wade

Daniel Wade

After working for multiple digital advertising agencies and managing hundreds of client accounts and spending millions of dollars via Google Ads, Facebook Ads, Native Ads and Direct Media Buying, I took things out on my own and started SparrowBoost. Now, my tight-knit team and I continue to get smarter and more efficient at running our own campaigns and we share our knowledge with you.

Learn more about SparrowBoost