How an online ad auction works
Every time someone searches or opens an app that shows ads, a very fast auction decides which ads appear and in what order. Understanding it explains a lot about why costs vary.
It is not just the highest bid
If the highest bid always won, the biggest budgets would take every spot. Platforms want people to see useful ads, so they score ads on more than price. On Google, the score is called ad rank. It combines your bid with how likely your ad is to be clicked, how relevant it is to the search, and how good the landing page is, along with the expected effect of extra information in the ad.
That means a lower bid on a more relevant ad can beat a higher bid on a poor one.
You often pay less than your bid
Your bid is the most you are willing to pay, not what you are charged. In most search auctions you pay just enough to keep your position over the ad below you. So the price per click you actually pay depends on how strong the competing ads are and on your own quality.
What affects the price
- Competition. More advertisers wanting the same people raises prices.
- Quality. Relevant ads and useful landing pages earn better positions for less.
- Time and place. Prices differ by time of day, season and location.
- Value of the customer. Industries where a customer is worth a lot, such as legal or home services, tend to have higher click costs.
Automatic bidding
Platforms can set your bid for each auction using what they know about the person searching. This can work well, but it depends on accurate conversion tracking. If the platform is told that something worthless is a conversion, it learns to find more of it. See conversion tracking and smart bidding in the glossary.
What you can do
- Write ads that match what people search for.
- Send people to a page that delivers what the ad promised.
- Track real conversions so automatic bidding learns the right things.
- Judge cost per customer, not just cost per click.