Surprise: Your Bid Doesn’t Determine Your Cost-Per-Click

The fall-out from Google’s Hal Varian Quality Score Video continues. One early impact was finally understanding exactly how quality score impacts your cost-per-click. A more interesting idea to get your head around: Your bid is not used in the calculation of your cost-per-click. Isn’t that amazing? How CPC is determined Using the information from the Google video, and some other Google-documented facts, let’s look at the exact sequence of steps that determine the position and cost-per-click of your ad.

1. Joe Smith types his search query into Google and clicks ‘Search’
2. Google and (using their ‘infinite wisdom’ machine) decide which advertisers have keywords and match types and budgets and geo-targeted day-parts that make their ads eligible to be shown.
3. Google calculates, in real-time, the Quality Score for each eligible keyword.
4. Google multiplies Quality Score x MaxCPC for each eligible keyword to determine the Ad Rank of each keyword.
5. The eligible keywords are sorted by Ad-Rank, highest to lowest.
6. Starting from the top of the list, the CPC for each keyword is calculated by taking the Ad Rank of KW below it, and dividing it by the KW’s QS . So if my Ad Rank is 50 and my QS=7, and the following keyword’s Ad Rank is 45, my CPC = 45/7 = $6.42.

Bid Is Not A Direct Factor Notice in Step 6: The bid was not a direct factor in the computation of the cost-per-click. It has a major influence, but it’s indirect, by determining your Ad Rank, which determines which keyword your rank above and that keywords rank is used to determine your CPC (by dividing by your quality score). The ramification of this, beyond being a cool way to trip up friends at PPC cocktail parties, is that we have to rethink the idea of changing bids to change our costs or positions. There is an effect and relationship, but it is far less direct that we typically think. Additional Steps Just to finalize, there are some steps after the above sequence before the entire process is complete.

1. For the last keyword in the list, Google uses some minimum required bid to determine the price.
2. There is a minimum CPC below which ads will not appear – so not every keyword on the original list is displayed. Google decides this CPC, and perhaps how many ads they want to appear. The point is that some (or many) eligible keyword’s ads are not shown.
3. After the rank and price is set, Google checks the MaxCPC of each KW against the MinBid required for a TOP position (ads that appear over the organic listings rather than on the right) and may move some ads to the TOP. Note that this decision is based on MaxCPC not CPC, and an ad in Position 4 may jump over an ad in Position 3 to get to the top if it had a higher MaxCPC.