Bidding & Optimization Strategies for the Modern Search Marketer
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This is my first blog post for Search Engine Journal. I plan to blog once a month on the topic of PPC, a field I’ve been involved in since 1998, when I was selling VHS cassettes of popular movies out of my dorm room.
I started working for Google’s AdWords division in 2002, where I first translated and launched AdWords in Belgium and the Netherlands, was then involved in product development and eventually became their lone AdWords Evangelist.
One of my longest stints at Google was on the Quality Score (QS) team where I saw it evolve from a simple CTR algorithm to an advanced machine learning system at the core of much of Google’s financial success. By showing the right ads to the right users at the right time, ads became more useful for both advertisers and users, and Google took that all the way to the bank.
Quality Score is calculated by a complex system and there are plenty of misunderstandings about it, so for my first post here I’d like to start with some of the fundamentals about ad rank, CPC, and QS.
Quality Score Directly Impacts CPC
By now most companies realize AdWords is a cost per click advertising system but grasping how ads are priced still seems to elude many. That’s probably because the simple math has gotten a lot more complex since a black box element was introduced. To explain the impact of QS on pricing, I find it helpful to look at two things: a quick history of how it used to work when the math was simpler, and a short explanation of how Google makes money.
1. How Ads Used to be Priced
Believe it or not, AdWords used to be a CPM based system. Whoever was willing to pay the highest CPM got their ads to appear above the organic results. Then AdWords introduced a CPC system which they called AdWords Select and a funny thing happened: the CPC ads started to generate higher CPMs than the ads placed through the legacy AdWords system. So, Google quickly shifted their entire business over to Select and rebranded that as just “AdWords” after sunsetting AdWords CPM. The reason Select was so successful is that Google would rank ads with this simple formula:
Rather than just using CPC alone, the formula also used the relevance (or CTR) of the ad, preventing irrelevant ads with high bids from monopolizing the top slots.
In a simple example, this meant that you could double your ad rank by either doubling your maximum bid, doubling your CTR or a combination of both. To maintain the same ad rank, you’d have to pay only half the CPC if your CTR doubled. And in one crazy twist, if two advertisers were bidding the same amount, the one with the better CTR would get the top spot and pay a lower CPC than the other one!
It’s this relevance factor that made AdWords so successful for smaller companies. While they might not have the ad budgets of their larger competitors, they were able to compete on relevance.
Nowadays the formula is this:
Ad rank is now an unknown function of three factors making it more of a black box, but by the end of this article it should be much clearer. We can no longer say that doubling QS will double ad rank. CTR is also no longer a factor. So that makes it pretty complicated, until you take a moment to think about how Google makes money…
2. How Google Makes Money From Ads
Google makes money when ads get clicked and advertisers pay the CPC associated with the click. Every quarter analysts on the earnings call seem very stuck on trends with the CPCs that Google is collecting, but I think they’re missing the bigger picture. Google has never cared about CPCs, they have always cared about CPM. In the beginning that’s how ads were priced and when the CPC system was introduced, it actually ranked ads on a CPM basis too.
I’m going to oversimplify a bit, but I think that was a smart move by Google because it let them control their own destiny. Here’s what I believe: if ads were ranked on a CPC basis, Google would be at the mercy of a lot of outside factors for their revenue. Like shifts in the economy, changes in how much advertisers are willing to spend per click, and the click behavior of users.
However if Google sells ads on a CPM basis and can hold that relatively steady, then they can double their revenue by doubling the number of searches people do. And that’s ultimately the only thing any company can really control: how good their product is and how many people use it. For Google, the product is the search engine and it’s good enough that nowadays they see 100 billion search queries every month.
The thing I want you to understand is while Google now has a more complex ranking formula, the way they make money is virtually the same as it’s always been, the advertiser with the highest CPM takes the top spot. So forget the complex ranking formula for a moment and consider that CPM can always be calculated using CTR and CPC. So then how does the new ranking formula compare to that much simpler old one?
Quality Score is Mostly CTR
Google now says they look at QS rather than CTR to determine ad rank so what is QS exactly? It’s made up of three components: CTR, relevance, and landing page quality. Turns out the first two factors are both about CTR so let’s look at each in a bit more detail…
The CTR Factor of QS
As Hal Varian, Google’s Chief Economist, has publicly stated, historical CTR is the largest component of QS. Considering what I just explained about how Google makes money by prioritizing high CPM ads, this should make total sense. Where it gets tricky is that Google uses a CTR they don’t show advertisers.
Google wants to create a level playing field so they need an apples-to-apples comparison of the CTR of all ads participating in an auction. So they look at only traffic from Google search, and only use the CTR when the query exactly matches the keyword. They also look at mobile and desktop CTRs independently and then combine the two in some fashion to derive the QS number that we can see in our accounts next to each keyword.
The Relevance Factor of QS
This is the factor that had advertisers screaming bloody murder when I helped launch QS and retire CTR as a factor in ad rank. This was the black box element that made advertisers uncomfortable. But, it turns out while it is not a transparent factor, it is simply a different way of looking at CTR.
Google launched QS because they understood that historical CTR could only go so far in predicting relevance and they could build a system to better predict the CTR for every query in real-time based on a wide range of other factors. For example, users’ click behavior is different at different times of the day and week, depending on where they are located, what type of device they’re using, and what additional words they type into the search box. These variances in CTR is what Google is looking for with “relevance”, but it’s still a CTR factor.
The simple job of this system is to distinguish between the best ad for a search for “Steve Jobs” when there are two advertisers using the keyword ‘jobs’: one a career site, the other a publisher of biographies. Only the ad for the book is relevant and the system can determine this thanks to the relevance component of QS. If it was looking purely at historical CTR, the career site may have had a better CTR and their ad would have shown instead.
The Landing Page Quality Factor of QS
Advertisers eager for clicks can be pretty sneaky, and at one point Google faced a quality crisis because of low quality, repetitive, and scammy ads. They came out with the landing page quality element to weed out these bad advertisers. It’s actually quite similar to Panda in SEO. As more iterations of Panda have launched, the algorithm has gotten better at identifying different types of poor content.
Similarly, landing page quality can now distinguish across a wide spectrum of qualities, ranging from horrible landing pages that should be ranked much lower to good ones that deserve a boost in rank. While this has no direct impact on how Google makes money today (it doesn’t factor into the CPM ranking formula), it helps safeguard their future revenue by ensuring users have a good experience and continue to trust ads.
The Impact of Ad Extensions On Quality Score
Now Google also factors ad extensions into ad rank. They don’t impact QS but since ad extensions can have a big impact on the CTR of an ad, it only makes sense that Google should consider this a factor in ranking. If there are two ads competing and only one has sitelinks that may boost the CTR 17%, then Google will certainly want to take that huge CTR booster into consideration when calculating the CPM which is used to rank ads. This also means that using ad extensions can lower an advertiser’s CPCs: if an extension doubles the CTR, then only half the CPC is required to maintain the ad rank.
Obviously, that doesn’t always happen because the improved CTR may also boost an ad into a higher position where it actually pays a higher CPC. But the point is that once again, a ranking factor that’s not called CTR is really all about the CTR.
How to Get a Better Quality Score
And how do we get a better QS? By having more relevant ads for our keywords and structuring ad groups in a way that supports higher relevance. While not a hard and fast rule, any ad group with more than 30 keywords can probably be divided into smaller ad groups with more specific ad texts. And focus on improving CTR by always A/B split testing new ads.
So there you have it…while the AdWords ad rank is now a complex formula and Quality Score is not as clear a metric to understand as CTR, they’re actually just different ways of saying the same thing. If you focus on achieving a great CTR, your Quality Score will follow.
Featured Image: Alexander Supertramp via Shutterstock
Other uncredited images created by the author.