In speaking with some people not in the Search industry there seems to be a lot of confusion surrounding how the PPC Auction works, and how the “Actual CPC” is calculated. This post should clear everything up.

In a nutshell…
- PPC auction is in real-time.
- Advertiser bids a CPC (Cost per Click) on Keywords.
- Ranking is determined by: Max CPC x Quality Score.

That seems pretty straightforward. So, now let’s get a little more granular in the actual calculations that Google goes thru to determine the Actual CPC.

To calculate advertiser A’s Actual CPC (in Scenerio #1), we divide advertisers B “Rank number” by A’s Quality Score, and add 1 cent.

Scenerio #1

Ads are ranked by Rank Number.

Rank number = ( Max CPC * Quality Score).

.65/1.8=.36 the result is the amount that would cause Adverstiser’s A ad to appear in Advertiser’s B’s position.

To appear above that position, you simply add 1 cent to that amount.
.65/1.8=.36 + 1 = $0.37 Actual CPC.

Note:
You only pay the CPC necessary ($0.01) to have a rank number higher than that of the next lower bid.

If a keyword has a low quality Score then Google sets a Minimum Bid needed for your keyword to enter the auction.

The factors affecting your ad rank are:
1) Quality Score
2) Max CPC

So, if you ratchet-up your Max CPC, you will increase your Ad Rank.

The factors affecting your Quality Score are:
1) The keyword CTR.
2) Relevance of ad text.
3) Historical keyword performance.
4) Quality of ad’s landing page.
5) and other relevancy factors.

Any optimization of these factors has the potential to increase your Quality Score, lower your CPC, and/or increase your Ad’s position in the SERP’s.

Here are 10 ways to increase your Quality Score.
In a follow-up post, I’ll write more detail on the Quality Score.

Related posts:

1. Industry Averages Aren’t Reliable
2. How to Get Included in Google News