How Do Google Ads Actually Work?

Many people think they understand Google Ads. From a consumer’s perspective, you perform a Google search, and some of the top search results are actually ads and the company is paying for you to click on it. From an advertiser’s perspective, you essentially “buy” your way to the top of a Google search. Right?

Yes … and no. It’s actually more complicated than that. To achieve real success and scalability from this amazing platform, it’s important to understand how the system actually works — so you can get the most out of it.

What Happens When My Ad Appears in a Search?

Hopefully this will blow your mind as much as it blew my mind when I first learned it. In the 1 second it takes for Google to return a search engine results page (SERP), a complicated auction is going on behind the scenes.

Companies who use Google Ads choose the keywords they want to target and the maximum amount they are willing to pay for a click against that keyword — just like entering the maximum you are willing to bid for an eBay auction.

But there could be thousands of companies bidding on one keyword. Which ones get displayed?

Unlike eBay, which uses a live-auction model, Google searches trigger an automated auction. In the time between clicking “Search” and the SERP appearing, Google Ads pits every company targeting that keyword against each other. 

The winners of the auction win the right to be displayed on the SERP — so they have a chance that the user will click the ad (and the company pays for the privilege of that click. No click, no bill).

So How Do You Win a Google Ads Auction?

Which company wins the auction to get displayed on the SERP depends on two main factors:

  1. The compay’s maximum bid per click.
  2. The quality score of the ad itself.

Specifically, the formula is this: 

Max Bid x QS = Ad Rank

So who gets displayed on the SERP? The bidders with the highest ad rank. 

Back up a second. We understand the max bid. The company can decide for themselves how much they are willing to bid. So what is the “quality score”? Who decides that?

Well, Google decides it. 

Think about this — if you Google-search “Camping Gear,” why does REI always pop up? Why not Bob’s Sports Shop, a mom-and-pop brick-and-mortar with a Shopify store?

Because REI likely has a much higher quality score. 

How does Google decide the QS? As usual with Google, it’s complicated. Google is known for simple front-end UX and complicated back-end algorithms.

In a nutshell, though, better ads get a higher QS. You get a higher QS if lots of qualified users click on your ad because the ad is more relevant to what they are searching. See why REI does so well? Because it’s a well-known brand that can afford a great website and they make sure their ads are relevant to the search term. This means not giving your sales pitch in the ad but focusing on what the user is actually searching for.

What This Means to You

The key takeaway of this equation reminds us of the old adage about how “the rich get richer.” Better-performing ads can get more exposure on SERPs even with smaller maximum bids.

Meanwhile, newcomers have to bid higher to beat the established ads.

Let’s say Bob’s Sporting Goods bids $4 for a keyword and has a low quality score … but REI has an excellent QS. REI could bid as little as $2 and still beat Bob to the SERP. Note, there is a more complicated algorithm on the backend, I’m just trying to explain the concept here.

Think of it this way: 

Max Bid x QS = Ad Rank

REI — $4 x 30 = 120

Bob’s — $2 x 100 = 200

See how that works? REI has a much higher ad rank with half the max bid. Therefore, it is likely to win many more Google Ads auctions than Bob … and pay less per click in the process. 


Moral of the story? People who try to half-ass their Google Ads tend to spend more money than they have to. 

I have said before that Google Ads offer any company the opportunity to “buy growth” … but it takes more than just throwing money at the problem. You don’t win Google Ads with brute force. You win by increasing your ad’s quality score. 

Raise the QS, and you can decrease your max bid and still win auctions — which means you get more traffic for less money, and your ad budget goes much further.

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