How Google Computes For Your Actual Cost Per Click

By Ricz Sabido On August 28, 2009 Under Pay-Per-Click Marketing

Want to know why Google gives your site a very poor quality score? Do you want to compute the actual cost that Google wants you to pay per click? Here’s what you need!

In this video, Hal Varian, Google’s Chief Economist, demystifies Google Adwords Program – how your ads participate in its ad auction, the real components of your quality score, and the math behind computing your actual cost per click.

Video Source: http://www.youtube.com/watch?v=K7l0a2PVhPQ

If you don’t like watching videos and prefer reading, then here’s a summary of the video above. As what I’ve discussed at Google Adwords Fast Track, Google wants its users to have the best experience that they can get from using their service. Google thus ranks your ads according to its quality score.

According to the video, Google’s Quality Score is composed of three components:

Click through Rate (appox. 65%)
- How often are your ads clicked?
Relevancy (appox. 30%)
- How relevant are your ads to its keywords, campaigns, and ad groups?
Landing Page Quality (approx. 5%)
- Does your website help the users find the information they’re looking for?
- Is your website relevant with unique high quality content?
- Is your website easily navigable with quick loading times and minimum pop-ups and pop-unders.
- Is your website transparent enough to its users? Do you have a privacy policy, terms of use, etc…?

Where does this Quality Score fits in the overall system?

According to Hal Varian, Google uses a concept called Ad Rank.

Ad Rank = Max Bid X Quality Score

This is how Google ranks different ads on their system:

Google Adwords Position

Hal Varian’s example shows 4 advertisers with different max cpc bids and quality score. To get the Ad Rank, Google multiplies their Max Bid and Quality Score. Google then ranks their ads according to its ad rank; the highest taking the top position, X means that the ad is not shown.

How Much Do You Actually Pay Google For A Click?

Hal Varian shows the exact formula how Google computes for your cost:

Exact cost of advertiser 1:

P₁ Q₁ = b₂ Q₂

To compute for P_1:
P₁= b₂ Q₂ / Q₁

Where:

P₁ = Actual cost Advertiser 1 has to pay
Q₁= Quality Score of Advertiser 1
b₂= Max Bid Of Advertiser 2
Q₂ = Quality Score Of Advertiser 2

As you can see, b₂ Q₂is actually the Ad Rank of Advertiser 2. Using this formula (P₁= b₂ Q₂ / Q₁), we can compute for the actual cost per click of Advertiser 1 on the following table (assuming all of the advertisers have $4 as its max bid):

Google Adwords Actual Cpc

The third advertiser gets the minimum bid because it has no advertisers below it. This proves that by increasing your Quality Score, you can actually lower your cost per click as it is inversely proportional to it.

How can this help you?

Using spy tools, you can actually extract and gather data like the ones above and position yourself to have the best rank having the lowest cost per click. For a more detailed explanation, you can watch the video above. For other information concerning Google Adwords, you can go to Google Adwords Support.