The cost for Google Adwords comes from a formula based on three things, 1) the maximum amount of a bid
for an ad in comparison with other bidders; 2) the ad’s quality score, and; 3) the ad rank. Advertisers maximize exposure and minimize cost by understanding the dynamics of how the Google Adwords rate is calculated and what steps to take to improve the results for ad campaigns.
Maximum Bid and Cost-per-Click
The maximum bid is the amount set by an advertiser for the maximum amount they are willing to pay for each click on an advertisement. The cost-per-click (CPC) is the actual amount paid for every click in a pay-per-click (PPC) campaign.
Google determines the quality score for an ad. This comes from a proprietary algorithm that is not completely disclosed by Google. This algorithm is a complex formula used to determine the relevance of an ad that takes into consideration the text ad quality, ad campaign, ad group, and the ad account. Advertisers know their quality score for keywords, but it is not possible to determine the quality score of competitors, nor does Google reveal the minimum accepted bid.
The best practices for increasing quality score include:
- Create ads that are relevant and compelling to generate high click-through rates.
- Make sure the text of ads and the landing pages match the search context as much as possible.
- Construct ad groups that closely relate to each other.
The ad rank is the maximum CPC bid times the quality score. The higher the ad rank is, the better the ad placement position in comparison to competitors.
Calculating the Cost-Per-Click
The formula for calculating the actual CPC of Google Adwords is:
Competitor’s Ad Rank (of the competitor next on the list in order below) divided by the advertiser’s quality score plus $0.01.
Understanding how the quality score influences cost and the position of ads, helps manage campaigns. Increasing a quality score usually increases the ROI on advertising. Paying attention to keywords that are negative, organizing the ad account, and copy testing advertisements helps improve the quality score.