Why does Google use an auction to determine the ads that appear on my pages?
As you may know, Google Ads advertisers on the Google Display Network submit a bid to show their ads on AdSense for content publisher sites.
The ad auction is used to select the ads that will appear on your pages and determine how much you’ll earn from those ads. In a traditional auction, interested bidders state the maximum price they’re willing to pay to buy a specific item.
Similarly, AdSense ad auction allows advertisers to state the price they’re willing to pay for clicks on ads or for impressions served on AdSense pages.
Because the ad auction ranks advertisers based on their bids and Quality Score, it creates a win-win-win situation: it assigns the ad unit to the advertisers who value it the most; the winning ads are therefore from the advertisers who are willing to pay the most, and the Quality Score-based approach ensures good user experience.
How does the ad auction work?
Before the ad auction takes place, AdSense system first narrows down all of the available Google Ads ads to determine which ones are eligible to compete to show on your pages. Here are a few ways that this happens:
- Ad targeting: AdSense only considers ads that are relevant to the content or users of your site. Through placement-targeting, AdSense will also consider ads from advertisers who have specifically chosen to show ads on your pages when they’ve found a match between their offerings and your site’s users.
- Ad format: Advertisers can create text or image ads, and choose contextual-targeting, placement-targeting, or user targeting, and so depending on the selections you’ve made, certain types of ads may or may not be eligible to show on your pages.
Just like in a traditional auction, the more advertisers that bid to appear on your pages, the higher the competition is for your ad units, and the more you can earn. The fewer restrictions you place on the ads that can show on your site, the more ads the AdSense system will be able to return, therefore increasing your revenue.
Once AdSense has a pool of eligible ads, the ad auction determines which of those ads will show up on your pages and how much each advertiser will pay. For each eligible ad, Ad Rank is calculated by combining the generic bid and the ad’s Quality Score.
Because ads are then ranked by Ad Rank, an advertiser with a low CPC bid but a high-Quality Score may win the auction against another competitor whose generic bid is higher but who has ad creatives that pose poor user experience and are not likely to be clicked.
This dynamic auction-based system also means that the price the winner pays varies from auction to auction, and from ad impression to ad impression, depending on the advertisers’ Quality Score for that page and on the level of auction competition.
Quality Score is a measure of how useful an ad is to the people who see it. It’s based on several factors, including:
- Predictions of advertiser performance, such as clickthrough rate (CTR).
- Factors affecting the quality of user experience from viewing the ad.
How are Actual CPCs calculated? How much does the winning advertiser pay?
It’s important to remember that an advertiser’s CPC bid isn’t necessarily how much they’re charged. The price an advertiser pays — Actual CPC — depends on the outcome of the auction, and it can often be less than their CPC bid.
The auction is designed to ensure advertisers have an incentive to bid their true maximum value and to remove incentives for advertisers to bid lower than their true value. Similar to the auction for Google search ads, an advertiser typically pays no more than what’s required to rank higher than the next best ad or to clear the auction floor, if any.
The auction for ads on the Google Display Network, however, differs slightly in that an advertiser typically pays that price only for incremental clicks they generate from being in their current position and pays the next highest ranking ad’s price for the rest of the clicks. Another difference is that for interest category ads on the Google Display Network a service fee may be added to the closing auction price in some cases.
To understand the concept of incremental clicks, you first need to understand that different ad positions have different visibility and can therefore yield different numbers of clicks. For example, in an ad unit with two ad positions, an advertiser might generate 10 clicks by being in the most visible top position, while that same advertiser might generate only eight clicks if he were to show in the less visible second position.
Here, the two additional clicks are considered the incremental clicks for being in the top position as opposed to the second position.
In the above simplified example, the difference in visibility of the two ad positions seems to be relatively small, i.e., they generate a similar number of clicks. The auction for ads on the Google Display Network is designed to make sure that advertisers are paying a fair price for incremental clicks.
The advertiser who wins the top position will pay enough to rank higher than the advertiser below, for the two incremental clicks; for the remaining eight clicks, he’ll pay a lower price — the amount he would have paid if he had ranked in the second position.
In other words, the Actual CPC that an advertiser pays is based on the weighted average of the bids and Quality Scores of the advertisers ranking below (and includes any applicable service fees). The weights are based on the incremental performance of the position.
Let’s look at a series of simplified examples to understand how this works. In these examples, AdSense assumes that the ads have identical Quality Scores for simplicity.
Example 1: Ad auction for an ad unit that shows one ad
|Advertiser||CPC bid||Quality Score||Ad shown?|
In this example, there are three advertisers with the same Quality Score competing for an ad unit that can show only one ad. Alice wins the auction because she is bidding the highest, based on a combination of CPC bid and Quality Score.
The amount that’s required for Alice to rank above the next best ad — Bob’s — is $3.01. Because this is an ad unit that shows only one ad, all of the clicks Alice receives are considered incremental to what she would have received in a lower position, which is equivalent to not being shown since there is no lower position. Alice therefore pays an Actual CPC of $3.01 per click.
Example 2: Ad auction for an ad unit that shows two ads
|Advertiser||CPC bid||Quality Score||Ad shown?||Relative CTR of position|
Let’s consider another simplified example for an ad unit that shows more than one ad.
AdSense uses the Relative CTR of position here to illustrate the concept that not all ad positions are equally visible and that higher ad positions yield more clicks than lower ad positions.
In this particular example, the top position is much more visible than the second position: an advertiser will generate three times more clicks in the top position than the number of clicks the advertiser would have gotten in the second position.
Bob’s Actual CPC is calculated in a manner identical to how Alice’s Actual CPC was calculated in the previous example. In this example, all of Bob’s clicks are considered incremental compared to what he would have received in a lower position, which is equivalent to not being shown.
Therefore, Bob pays an Actual CPC of $1.01 per click.
Alice’s Actual CPC in this example depends on the incremental clicks she generates from being in the top position as well as Bob’s Actual CPC. According to the Relative CTR of position, Alice is getting three times as many clicks by being in the top position compared to being in the second position.
Therefore, two-thirds of her clicks are considered incremental, while the remaining one-third are clicked she would have gotten if she had occupied the second position. Conceptually, Alice pays what Bob did ($1.01) for the first one-third of her clicks, the same number of clicks Bob received.
For all of the incremental clicks her better position delivers to her, she pays more ($3.01). On average, Alice’s Actual CPC will be:
$1.01 * ⅓ + $3.01 * ⅔ = $2.34. This is the price that Alice pays for each of her clicks resulting from this auction.
This type of auction pricing that takes into account incremental performance of different ad positions helps create an incentive for advertisers to bid their maximum value for a click since an advertiser gains nothing by bidding lower but risks missing out on valuable clicks.
Going beyond the simplified examples above, Google will sometimes run an auction and determine that showing one ad is better than showing multiple ads in an ad unit large enough to accommodate multiple ads.
These decisions are made in the auction and the Actual CPCs of ads shown are calculated based on the same principles and mechanism as the simplified illustrations above.
What factors impact the ad auction?
Because the ad auction is dynamic, the outcome of each individual auction and your earnings can change depending on a number of factors.
One factor is how advertisers set up their AdSense for content campaigns, which will affect which auctions they enter. Here are a few examples:
- Seasonal campaigns: Advertisers can set up campaigns to run during specific times of the year, where they spend more money in a short period of time or change their bids dramatically.
- Ad targeting: Advertisers can choose to have certain campaigns be only contextually-targeted or placement-targeted to publisher sites.
- Geotargeting: Advertisers can also target their ads to specific regions and choose to bid based on time of day.
- Automated bidding: If an advertiser is using Automated Bidding, their bids may be automatically adjusted to deliver clicks or conversions against specific targets they’ve set.
All these factors mean that the same ads are not always competing for your ad space, so your earnings may vary as a result.
Another factor that impacts your earnings is the ads that users choose to click. Since ads across your pages will have different bids and Quality Scores, ads are not all are priced the same.
But, it’s important to remember that any ad that appears on your content pages has won the auction for that space. Winning ads should be relevant to your users and help you earn the most from your pages.