How Does Google Adwords Work?

If you’re wondering “How Does Google Adwords Work?”, you’ve come to the right place. Google Adwords is an awesome Pay-Per-Click Advertising Platform by Google, that enables you to display your Online Ads to the right people who are actually looking for your product or service. In order to get good Ad placement and lower your Google Adwords Cost of Advertising, it’s important to understand how Google Adwords works under the hood.


How Does Google Adwords work?

The most important aspect of Google Adwords is the Ad Quality Score (QS). Quality Score is a score (1-10) assigned to your Ad, by Google, based on the relevance of your Ad Group, target keywords, ad creative, click-through rates, and landing page to what a user is searching for, on Google. So the most effective way to improve your Google Ad Placement and lower your Google Ad Campaign cost is to basically improve your Google Ad Quality Score. Here’s a free google tool to check your quality score.

Google Adwords works based on an Ad Auction model. Every time a person searches for something on Google, an Ad Auction is created on Google Adwords platform. Every advertiser who has a target keyword that matches the search string, is eligible to compete in this auction. The advertisers compete based on an Ad Score, called Ad Rank, calculated by Google Adwords Platform.

Ad Rank = Quality Score x Maximum Cost-per-click (CPC) bid Amount

All the Google Ads relevant to a keyword are ranked based on their Ad Rank. The Google Advert with the highest Ad Rank gets the top spot, the ad with the next highest ad rank gets the second spot, and so on till the last eligible ad for the auction, or the last available position in the displayed ad list.

The advertisers enter the maximum CPC bid amount for each ad, when they create a Google Adwords Campaign, which is used to calculate their Ad Rank.


Find the right target keywords for you Ad Campaigns using Google Adwords Keyword Tool


How much do you pay for a Google Ad?

Now, what you actually pay for a Google Ad is basically the lowest amount required to beat the Ad Rank of your competitor below you. It’s called the discounter and is one of the most important aspects of determining the Google Adwords Cost for your business. Here’s the formula Google Adwords uses to calculate the actual cost-per-click

Actual CPC = Ad Rank below yours/Quality Score + 0.01


Let’s look at it in detail, with an example and you’ll see why it’s so important to improve your Ad Quality Score

Let’s say you have Ad Quality Score (QS) of 8 for your Google Ad for the keyword “san+francisco+beach+house+for+rent”. Let’s say you want to rank at 1st position for this keyword, no matter what, and you bid an exorbitant amount of $100 per click. So your Ad rank is,

Ad Rank = $100/click x 8 QS = 800

So a competitor would need to have an Ad Rank of more than 800 to beat you. It means that even if he has the maximum possible quality score of 10, he would still need to bid at least $80.01 to be on top. Instead, let’s say he bids a realistic amount of $10, then the amount you pay would be as follows,

Ad Rank below yours = 100 ($10/click x 10 QS)

Your QS = 8

So Actual CPC = 100 / 8 + 0.01 = (100 Ad Rank below yours/8 Your QS + 0.01) =  $12.5/click

As you can see, even though you bid $100/click, you only have to pay $12.5 for your position.

Now, if your Quality Score for that auction was 10, then the amount you pay would be

Actual CPC = 100/10 + 0.01 = (100 Ad Rank below yours/10 Your QS + 0.01) =$10.01/click



Bonus Read : 3 Best Google Adwords Reports to Optimize your PPC Marketing Campaigns. Also learn How to Become a Google Adwords Partner



In fact you can actually end up paying LESS than the spots below you.

Let’s say you bid the same crazy amount of $100 per click, get the top ad placement and here are the next 3 advertisers in the google ad listing for your target keyword

Position 2 : QS = 5 for $10 bid amount

Position 3 : Qs = 7 and $7 bid amount

Position 4 : QS = 5 and $9 bid amount


Now let’s look at their Ad ranks and minimum bid amounts you need to pay to beat theirs, assuming your Quality Score =8 , as before

Position 2:

Ad Rank = 50 = (QS 5 x $10/click)

Actual CPC = $6.26 = 50/8 + 0.01 = (50 Ad Rank below/ 8 Your QS)+0.01


Position 3:

Ad Rank = 49 = (QS 7 x $7/click)

Actual CPC = $9.81 = 49/5 + 0.01 = (49 Ad Rank below/ 5  QS of position 2)+0.01


Position 4:

Ad Rank = 45 = (QS 5 x $9/click)

Actual CPC = $6.44 = 45/7 + 0.01 = (45 Ad Rank below/ 7 QS of position 3)+0.01


As you can see, you need to pay only $6.26/click for being in position 1, compared to what you would have to pay if you were in position 2 or 3. The same holds true if you would have appeared in other spots too, such as 2, 3 and so on. In the above auction, if you had appeared in spot 2, you would have paid less the advertiser in spot 3 and so on.


You can also read our Complete Guide to Adwords Remarketing and Complete Guide to Adwords Conversion Tracking.


How to Dominate Google Adwords Auction?

Have you ever wondered if it’s possible to control Google Ad Auctions? With a Quality Score of 10, you can literally dominate your Google Ad Auction. This is because, with a quality score of 10, you’re not only paying the least amount for your position, but also forcing your competitors above you to shell out the maximum amounts for their positions. Think about it! The key is to improve your Ad quality score so that your ads are highly relevant to your target search keywords and your landing pages provide a great user experience.


Check out our Google Adwords Campaign Examples to create highly effective google ads. Also read about Expanded Text Ads by Google to help you drive more website traffic.



Hopefully, now you know Google Adwords works, and the little nuances to be careful about. Google Adwords is a fantastic Advertising Platform that allows you to easily optimize your Ad Campaign Performance by controlling various factors such as target keywords, ad audience and even quality score. However, you can greatly improve your Ad Campaign performance by targeting the right low competition keywords and creating highly relevant Google Ads that improve your ad quality score, increase your Ad rank, lower the actual CPC amount that you pay and get you prime Ad placements.


Bonus Read: 5 Best PPC Management Software to manage your PPC Advertising Campaigns.


Do you have any tips to improve Google Ad Campaign Performance?