May 13, 2008 114 reads by Navneet Kaushal

With millions of keywords up for grabs, it becomes virtually impossible to put a price tag on each of them. Hence, the process of Auction. As Google explains, every search engine uses the auction process for setting prices for advertisements. The auction process works as a non-biased procedure, as the prices of advertisements are set by participants themselves. These auctions get updated everytime a user enters a query and therefore these auctions always show the real-time time values that advertisers place on keywords.

Due to the non-biased nature of the auctions, the available advertisement slots are awarded to those who bid the highest value. The auction process also exercises equality as the cost an advertiser would pay for an advertisement is determined by other advertisers, or in other words, his competitors. The auction process can be broken into several steps, and these steps are:

  1. Each advertiser provides a list of keywords, advertisements and bids.
  2. As soon as a user enters a query, Google compiles a list of all the advertisements and then cross checks matching keywords for the particular query.
  3. On the basis of bids and the Ad Quality Scores that measure the relevance of the advertisement to the user, the list of the advertisements is cataloged.
  4. Then in a hierarchal structure, the highest ranked advertisement is displayed in the most optimum position. The highest ranking advertisement gets the most optimum position, second highest ranking advertisement gets the second most optimum position, so on and so forth.
  5. When a user clicks on the advertisement, depending upon the bid and the advertiser's Ad Quality scores, the advertiser is charged for the click. The price charged is the minimum amount essential for the advertiser to retain his position in the list.

In the event that all the advertisements have the same Ad Quality Score, then the advertisements will be ranked by bids and the price an advertiser pays would be equivalent to the bid of the advertiser below him in the rankings.

In more generalized cases, where the Ad qualities differ, then the amount that an advertiser has to pay will depend upon the Quality Score of his advertisement against the Quality Score of the advertisement below it in the auction.

Origins of Advertisement Quality Scores:

In the past, the quality scores for advertisements were determined by click through rates. However, like many other methodologies, this method too went through the phase of evolution and using sophisticated statistical models, it has been greatly refined. The use of advertisement quality as a major ranking factor, compels the advertisers to create relevant advertisements for their users.

Google runs two auctions simultaneously. One related to advertisements for the top of the page and other for advertisements on the side of the page. The most relevant and high quality advertisements are selected for the top page, average advertisements are left for the side of the page. However, poor quality advertisements may altogether be disabled and not shown at all.

This entire post has definitely been an eye opener for many advertisers, who always had a question mark in their minds, about the working of Google's auction models.

Navneet Kaushal

Navneet Kaushal

Navneet Kaushal is the founder and CEO of PageTraffic, an SEO Agency in India with offices in Chicago, Mumbai and London. A leading search strategist, Navneet helps clients maintain an edge in search engines and the online media. Navneet's expertise has established PageTraffic as one of the most awarded and successful search marketing agencies.
Navneet Kaushal
Navneet Kaushal
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