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Your actual CPC is out of your control (mostly)

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By Dave Beltramini, Director of Paid Advertising, G5 Search Marketing

Paid Advertising on the major search engines can be a significant driver of leads to your website. However, identifying the best way to spend money in that world is more confusing and arduous than you might imagine.

Prior to 2005, Google was a straightforward process. You bid a certain dollar amount and, if you were the highest bidder, you paid one cent more than the next highest bidder. But Google’s Ad Rank calculation changed that process.

Now knowing what you will pay for a click is not that simple.

What you are willing to bid has only an indirect role on your cost. The more important factors in determining cost are quality score and the aggressiveness and performance of your competition. These will influence your CPC far more than the maximum you are willing to spend.

To determine your CPC, Google uses a two-step process. (Yahoo and Bing do not disclose how CPC is calculated).

Step One is the auction for your Google search term (e.g., Assisted Living, Milwaukee). Every single Google search triggers a unique auction. These auctions use a formula that calculates “ad rank” as the first step. Ad Rank determines which position your ad will appear (or if it will appear at all) for a given search.

Ad Rank = Max CPC X quality score (1-10 scale with 10 the best)

An example:

• You bid $2.00 for the search query Assisted Living, Milwaukee

• Google determines your quality score for your ad is 8

• Your Ad Rank = 16 ($2.00 X 8) The Ad Rank calculation shows us that Google values both the bid and the quality score of a search query equally.

Step Two is to calculate cost per click.

Google takes the Ad Rank of the ad below yours, divides it by your Assisted Living, Milwaukee quality score, and then adds $0.01.

For example:

• Your ad for Assisted Living, Milwaukee earns position #3 with an Ad Rank of 16

• Max CPC is $2.00, quality score is 8

• The Ad Rank of the competitor in position #4 (just below you) was 12

• Your CPC would be $1.51 because (12 ÷ 8) + .01 = $1.51 (The competitor’s Ad Rank of 12 divided by your quality score of 8, plus $0.01)

Bidding is under your control, but its impact is indirect. Let’s take the example above and change your max bid to $3.00 from $2.00:

• Your ad for the Assisted Living, Milwaukee keyword earns position #3 with an Ad Rank of 24

• New Max CPC is $3.00, quality score is still 8

• The Ad Rank of the competitor in position #4 (just below you) is 12

• Your CPC would be $1.51 because (12 ÷ 8) + .01 = $1.51 (Their Ad Rank of 12 divided by your quality score of 8, plus $0.01)

• You still pay the $1.51 based on the formulas despite bidding 50% higher

These calculations show that your bid does play a role, though an indirect one. Ad Rank helps to determine which keyword is below you, and it’s the Ad Rank of that keyword which influences your CPC. This is how the quality and aggressiveness of the competition drives your price.

To illustrate, here is another example:

• Your ad for Assisted Living, Milwaukee earns position #3 with an Ad Rank of 20

• Max CPC is $2.00, quality score is 10; previous quality score was 8

• The Ad Rank of the competitor position #4 (just below you) is 12

• Your CPC would be $1.21 because (12 ÷ 10) + .01 = $1.21 (Their Ad Rank of 12 divided by your quality score of 10, plus $0.01)

Of course the Ad Rank of your competition is not listed in Google. The main reason you can’t simply look it up is that it changes in real time for every search query. Also, Google isn’t running a transparent auction.

The lesson here is that bids and quality score work together to set the prices you pay for paid search clicks. Of the two, quality score has a slightly more important role resulting in the need to allocate as much (or more) time and energy to quality score management as to bid management.

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