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The Optimizer’s Guide to Google Adwords: How your cost per click is determined
Here is a common situation that many Google Adwords rookies encounter. You have just setup your first Google Adwords campaign and have decided that you’re willing to pay $2.00 for every click on your ad. You proudly enter that as your default max cost per click (CPC) for your adgroups and launch your campaign. You expect to pay $2.00 for as many clicks as Google can get you.
But the next day you check your Adwords account and you see the following:
At first you’re excited. You were willing to pay $2 per click but Adwords only charged you $1.51. That seems good…Google didn’t even charge you as much as you expected for the traffic they sent your way.
But then you take a look at your average search results position and notice that you averaged the 3rd best position. Why is that? Why didn’t Google take the $2 you were willing to pay for each click and give you a slightly higher position? How did Google arrive at exactly $1.51? The answer is Google’s cost per click equation.
Google’s Cost Per Click Equation
The driving principle behind Google’s Cost Per Click equation is this: You will always pay the lowest amount for the highest position you can get. In other words Google Adwords is charging you the minimum amount for you to maintain the position you achieved from your AdRank score. AdRank is a numeric value you get by multiplying your Quality Score by your bid. Your Quality Score is a general measure of your relevance to the keyword in question (New to AdRank or Quality Score? Check out my earlier post). Your cost per click is calculated by dividing the AdRank of the ad beneath yours by your Quality Score and rounding up to the nearest cent.
Actual CPC = (Ad Rank to beat ÷ Your Quality Score) + $0.01
Example
That sounds complicated so go over an example that will make it more clear. Let’s say that Jeff and Tom are both eligible to show ads for the same search term.
Jeff has set a maximum cost per click of $3 and he has a quality score of 5. His AdRank is then Max CPC times Quality Score which is 3 x 5=15.
Tom’s keyword has a maximum bid of $2, a dollar lower than Jeff’s. However, he’s got a Quality Score of 9, giving him the higher AdRank of 18.
Because Tom has the higher AdRank than Jeff, he wins the better ad position. How much does he pay? Lets consult the equation above. Google Adwords takes the ad-rank below him (Jeff’s 15) and divides by his own quality score (9). Then, add one cent. Jeff pays 15/9 + 0.01 = $1.68 (which is lower than his maximum bid of $2).
Exceptions
If your ad is the only ad showing, a click costs the lowest price possible to show. This depends on the matched keyword’s Quality Score – the higher the score, the less you pay.
If your ad appears above the search results, click cost is determined in the same way as an ad on the side of the page, but the keyword bid and Quality Score must meet certain thresholds. For more about that, click here.
For more information of Google Adwords be sure to check out my other posts!
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