Understanding Google's Ad Rank and Pricing

Traditional Explanation: Ad Rank = Max CPC x eCTR

For years, advertisers have understood Google's ad ranking system through a simplified formula: Ad Rank = Max CPC (Maximum Cost Per Click) x eCTR (expected Click-Through Rate). This basic equation suggests that ad placement is determined by the bid amount set at the keyword level, multiplied by the likelihood that users will click on the ad.

Insights from the CMA's Public Filing

Google provided The Competition & Markets Authority (CMA) deeper insights into how Google's ad ranking and pricing mechanisms work, revealing complexities beyond the traditional formula.

Detailed Breakdown of Ad Rank

Ad Selection Process

When a user enters a query, such as "insurance," Google evaluates hundreds of ads that might be relevant. Ads are "weeded out" based on several factors, including:

- Language Mismatch: Ads in a different language than the query.

- Location Mismatch: Ads targeted at a different location than the user's estimated location.

- Budget Constraints: Ads that have exhausted their budget.

- Policy Violations: Ads that violate Google’s policies.

- Expired Payment Methods: Ads with an expired credit card.

Ad Mixer and Ad Score (LTV Score)

The selected ads are then processed by a system known as the Ad Mixer, which assigns each ad an Ad Score or Long-term Value (LTV) Score. This score is crucial in determining whether an ad appears on the SERP and its rank.

Factors Influencing Ad Score

- Bid Amount: The amount the advertiser is willing to pay per click.

- Ad Creative Quality: The relevance and appeal of the ad content.

- Landing Page Quality: The user experience and relevance of the landing page to the ad.

Importance of Long-Term Value (LTV)

Google emphasizes the significance of LTV in ensuring sustainable ad quality and relevance. By prioritizing high LTV scores, Google aims to avoid the short-term gains from irrelevant ads, which could degrade user trust and long-term profitability.

Significant Changes in Ad Rank Mechanics

Dynamic Thresholds

Since January 2019, Google has introduced dynamic thresholds for each auction. These thresholds are set based on the performance of similar auctions, allowing for better optimization and relevance of ads in related queries.

Randomized General Second-Price Auction (rGSP)

Google has implemented a randomized general second-price auction (rGSP). This auction model, influenced by machine learning, adjusts the auction dynamics to optimize revenue while maintaining ad quality. The rGSP model aims to balance the competitive landscape, ensuring advertisers have fair opportunities even if their LTV scores fluctuate.

Key Takeaways

1. Complex Ad Ranking: Google's ad ranking system involves more variables than the traditional Max CPC x eCTR formula, incorporating dynamic thresholds and LTV scores.

2. Focus on Quality: The emphasis on ad and landing page quality ensures a positive user experience, which is crucial for long-term engagement and profitability.

3. Adaptive Systems: The introduction of dynamic thresholds and rGSP showcases Google's efforts to refine its auction processes, balancing advertiser competition and revenue optimization.

In summary, Google's ad ranking and pricing mechanisms are sophisticated systems designed to balance advertiser bids, ad quality, and user experience, ensuring sustainable profitability and relevance in search advertising.