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How Google Ads Works [Simple & Complete Guide for Newbies]

How Google Ads Works, how google adwords works, how does google ads work

What is Google Ads? How Google Ads Works?

I’m sure as someone who’s just launched a business and raring to go (and take on the world!), you must have given a serious thought to advertise on Google. Google Ads (formerly called Google Adwords) is Google’s advertising platform that works on a pay-per-click model - PPC advertising, as it is known as (and more on this point later). With Google raking in approximately 97% of their revenue through their Google Ads channel, it remains one of the most sought-after online marketing platforms for businesses of all sizes. In this article, we delve deep into knowing What is Google Ads and How Google Ads Works.

So, what is Google Ads?

Google – the search engine behemoth – is a treasure trove for both businesses and customers. It acts as a referral system (if you may) in that someone is searching for a query and Google serves what it deems to be the most relevant information they are looking for. This is how a typical Google search looks like on the SERP (Search Engine Results Page):

Typical Google Ad, What is Google Ads, what is google adwords

But if Google were to simply connect the person seeking something with the relevant information, how does it generate revenue for itself? The answer, and you may have guessed it, is – Google Ads! It is a monetizing platform (called pay per click advertising) wherein Google displays a certain number of advertisements on its search results page. I’m fairly certain that you must have come across such ads while browsing for a product or service. This is what a typical Google ad looks like:


But before we prod any further as to how Google Ads works, let’s understand as to why Google Ads has evolved into this giant advertising platform that any serious online marketer considers. It is one of those services that is hard to ignore, so let us see why.

How many Google searches per day? The many, many & many queries!

Honestly, have you wondered just how many queries does Google handle in a day? It’ll be super interesting to know that, right? As much as our collective interests are piqued on that subject, unfortunately, Google has been tight-slipped about it and has not shared that data since 2012.

In 2012, Google claimed that there were 1.2 trillion searches per year. Four years later, that is – in 2016, it released an update claiming that there were “trillions” of searches per year. We don’t really know the exact figure what it could be. It can possibly be 10 trillion or 100 trillion or more. But because we don’t have an exact number to pinpoint to, we can safely assume that there are at least 2 trillion searches. That is just an astounding number! 2 trillion searches in a year translate to 63,000 searches per second! Just think about it. Every second that passes by, there are 63,000 queries being searched on Google.

You can read more about it here: Click here to read!

How many Google searches per year, how many google searches in 2018
The amount of queries asked on Google is just mind-boggling!

Not only that it is interesting already but according to The SEM Post there are 15% unique searches happening on Google every single day. For instance, let’s say that there were 1000 search queries on Google today. Out of those, there were 150 queries that Google has never seen them before. They are completely unique. That’s incredible!

Now, what does all of this mean? It means that every year there are at least (assumingly) 2 trillion searches happening on Google each year, which in turn means that there are 2 trillion queries looking for some response and that could be for anything. It could be a simple search for a piece of news or to search for some kind of online/offline service. It could be for a local brick-and-mortar store, or to look-up the closest dentist you need to show your chipped tooth to, or to search for a pet store to gift your kid a cute little kitten. Whatever the queries are, there are businesses out there offering all kinds of trinkets and services.

Google thus plays the role of a matchmaker, if you may - pretty much like that annoying aunt we all have! People search for something and businesses offer those people what they are searching for.

The problem however is that not all businesses end up displaying their services to those who are searching for it. The primary reason is that the Google SERP only has a limited number of slots to display information. Take a look here:

When I searched for “Best sports bike in India”, Google displayed a total of 9 organic listings (i.e. listings that are not ads). Usually, it displays 10 listings (... it did, when I searched for “Best sports shoes for men”). But it is often quite difficult for businesses to come up on the first page of Google, especially if they are newly launched. It takes a considerable amount of time, sometimes months or even years in some cases, to really start ranking high up on certain keywords in order to start appearing on Google’s first page.

This is where Google Ads come in extremely handy and lifesaving (rather business-saving, I should say). With Google Ads, businesses do not have to wait for months or years to display their services and wares to customers needing it. It is all pretty instantaneous and they could be driving interested customers by throngs to their websites and generate sales.

Google usually reserves up to 7 ad blocks on its page to display ads – 4 ad blocks above the organic listings and 3 below it. It looks like this:

Top 4 ad blocks in Google Ads

4 ad blocks in Google Ads, 4 top slots in Google Ads, Top 4 ad blocks in Google Ads

Bottom 3 ad blocks in Google Ads

Bottom 3 ad blocks in Google Ads, 3 ad slots in google ads

This route is what a lot of businesses take as their advertisement is displayed to the end user rather swiftly. It’s a win-win for all.

Armed with the information so far and having a decent understanding as to what is Google Ads and why people seriously consider using it for advertising, let’s now dive straight into how Google Ads works.

How Google Ads Works?

Google uses an auction system to rank the ads in the search results page and will ultimately determine the position of your ad and how much you will end up paying should someone click on it.

There are certain primary fundamentals to understand how Google Ads works:

1. The Google Ads auction focuses on relevancy : There are 3 entities involved – Google, advertiser and the user. Google is not a yellow pages, it is not an advertising platform per se. It is a search engine, much like a referral network. Its job is to send a person to the most relevant page that will help the user with the information he is seeking.

Thus, search query to text ad relevance is one of the most important fundamental of the relevancy spoken about here. Google really cares what the text of your ad says and how relevant it is to the query a user has typed in Google search.

If I were to search for online cooking classes and Google showed me an advert for health insurance, I would obviously not click on it because I’m not looking at purchasing any insurance at the moment. The advert is completely irrelevant to the information I’m searching for. What happens if this happens all too often? It is highly likely that I will be really annoyed and stop using Google’s search altogether and move on to other search engines like Oath (formerly Yahoo!) or Bing.

Google also takes into account the relevancy of the landing page – as, an ad is only useful to the user if they find what they are looking for. A good relevant landing page should have nice helpful content, it should be easy to navigate and also be transparent with regards to how the advertiser’s website interacts with the user’s computer.

This is why Google places a ton of emphasis on how relevant the text of the ad is to the query a user searches and the landing pages. Google wants to provide a great experience to the user and provide value to the advertiser in an attempt to retain them as customers and continue to use its system.

2. Google uses the ‘second price’ model : You only need to pay what the advertiser below you is bidding plus a penny. In conventional auctions, you’d raise your hand and scream an amount and the product will be sold! But that’s not how it works with Google ad auction. You only need to pay to beat the advertiser below you to maintain your position.

3. You only pay for clicks : Your ad may be shown on the SERP a zillion times but you don’t have to pay if you don’t receive clicks on it. The number of impressions does not matter. Remember when we said that Google uses the pay per click marketing model? You receive a click, you pay. It’s pretty simple.

4. Max CPC bid : A lot of people get confused on this one but it’s quite straightforward. The Max CPC bid is the maximum amount you are willing to pay for a click. It does not mean that you will end up paying that amount each time someone clicks on the ad. For instance, if you’ve set your Max CPC bid at $8, you are telling Google that you are willing to pay a maximum amount of $8 for a click but not more than that. You may even end up paying way less than that but not more than $8.

5. Every search triggers an auction : Assuming that there are 3 billion searches a day, there could be 3 billion live auctions happening (provided that each of those searches is eligible for ads). A live auction means that there are a lot of live variables. Your data might show that your quality score is 8 out of 10 but that does not necessarily mean that it is the actual live quality score. Every time someone searches, there’s an auction that is triggered which may change your quality score, the competitive landscape may change – some advertisers may bid more aggressively while some may not enter the auction at all (i.e. they won’t be advertising).

All of these variables will affect the entire auction - your ad rank, the position you will occupy and how much will you end up paying. It is a live market, it is a live auction and it all happens within a fraction of a second.

Now that you have a good understanding of Google Ads insights, let’s dive into modern day Google Ads auction, understand how Google Ad Rank is calculated, what number your Ad Rank is, how the Ad Rank determines your place in the auction and more importantly how it all works in the auction that determines what you pay when someone clicks on your ad.

What is Google Ad Rank?


According to Google, it defines Ad Rank as: A value that's used to determine your ad position (where ads are shown on a page relative to other ads) and whether your ads will show at all.

Remember we said earlier that Google shows 4 ads on top of the organic listing in the search results page? Your ad rank determines which position you take in those ad blocks. A higher ad rank means that your ad will be displayed at the coveted first position or it’ll take the spots below it if the calculated rank is lower than others.

How is Ad Rank calculated?

In 2005, Google introduced a revised formula to calculate Ad Rank. The formula is:

Ad Rank = Max CPC Bid x Quality Score

In 2013, Google introduced the expected impact of ad extensions on CTR as part of the ad rank formula. Google found that different types of ad extensions such as sitelink, callout, review extensions etc. could favorably aid in CTR and included these ad extensions CTR projections into the ad rank formula. We don’t know how the ad rank formula changed to accommodate the ad extension factor but it is assumed that it is not more than 20% of the total quality score portion.

An example of the sitelink ad extensions:

Sitelink extensions, example of sitelink extensions, Google Ads Sitelink Extensions

With nobody really knowing the exact portion of it, we will stick with the primary formula which is:

Ad Rank = Max CPC Bid x Quality Score

Now, let’s make things interesting. Let’s see how the auction works and the ad rank calculated. Let’s assume that there are 5 advertisers bidding for a keyword but there are only 4 ad spots available on the search results page. Therefore, there are only 4 advertisers who will win the auction.

Let’s meet our 5 advertisers and their (fictitious) Max CPC Bid and Quality Scores.

Advertisers Max CPC Bid Quality Scores
Josh $10 1
Neha $4 3
Kevin $6 8
Ali $5 9
Emma $5 3

Thus, based on the Ad Rank formula mentioned earlier, their ad ranks turn out to be:

Ad Rank = Max CPC Bid x Quality Score

Advertisers Max CPC Bid Quality Scores Ad Rank
Josh $10 1 10
Neha $4 3 12
Kevin $6 8 48
Ali $5 9 45
Emma $5 3 15

Based on these ad ranks, the 1st ad spot will be awarded to Kevin because his ad rank is the highest (35), followed by Ali (30), then Emma (20) and finally the 4th spot will be occupied by Neha (12).

Interestingly, although Josh was willing to pay a whopping $10 max CPC bid, he is dropped out of the auction because of his low quality score which made his ad rank the worst amongst all and there is no 5th ad spot available.

Advertisers' position on SERP Ad Rank
Kevin 48
Ali 45
Emma 15
Neha 12

Google has set their auction such that the advertisers bid the maximum amount they are willing to pay for a click, however they actually only need to pay the minimum amount to maintain their position. In other words, they only have to pay the minimum amount of the advertiser directly below them.

To calculate the actual CPC an advertiser pays, we use the following formula to determine it:

Your Actual CPC = Ad rank of the advertiser below you ÷ your quality score.

In our example, the actual CPCs of the advertisers turn out to be:

Advertisers Max CPC Bid Quality Scores Ad Rank Position on SERP Actual CPC
Kevin $6 8 48 1 $5.62
Ali $5 9 45 2 $1.66
Emma $5 3 15 3 $4
Neha $4 3 12 4 $3.33
Josh $10 1 10

If you notice, Ali and Emma are having the same max CPC bid of $3, yet Ali ends up paying a lot less than Emma and occupies the second position in the SERP above her. That’s mainly because of his excellent quality score and it plays a huge role in determining your actual CPC.

Of course, during a live auction, one can never know what the competitors’ bids are and what quality score they are at. A slight change in the quality score or the max CPC bid of a single competitor could result in a complete change of your actual CPC

Now that you know a great deal about Google Ads and how they work, you should be off to the races! If you need help in setting up your Google Ads campaign, feel free to get in touch with us.

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