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How Google Ads (AdWords) Works

Google’s advertising program called Google Ads is its most profitable product and, frankly, it isn’t even close (Patel, 2017). They must be doing something right if so many people around the world are willing to spend money on this thing. Google Ads as a concept is not unique but just like Google does with search, it is the best-executed ad network there is. In this chapter, I’m going to walk you through the basics of AdWords style networks and how they work. To understand how to be successful, understanding the format of this type of advertising is crucial. So let’s take a look.


Pay Per Click


AdWords is a performance-based ad network, like every other advertising platform on the internet. This means that you’re not paying for an advertising spot. Instead, you’re paying for a particular action to be carried out. The action you pay Google for is a click. Hence the term pay per click or PPC ads. The way it works is quite simple. Each of your ads target a particular keyword or phrase and when a person searches for this phrase, your ad shows up. If they click on it, you get charged a certain amount and Google transfers the person to your website or landing page. Simple, right? This is in direct contrast to how advertising has traditionally worked in the newspaper or magazines and such. Over there, you’re paying to rent space in their publication upfront while you have no way or tracking the efficacy of your campaigns. You could include a code in your ads of some sort, but even those methods are pretty tough to measure. PPC ads have no such problems and therefore enable you to focus like a laser on just the things that are working for you and invest more there. Google helps you out with all of this thanks to the mountain of data they provide you with. The first thing for you to understand is the mechanics of how Google decides which ads to show first and in what order.


Auction


The Google Ads market for a keyword is an auction. Various advertisers place bids, and Google selects whose ads to display. At least this is how it used to be when AdWords was first rolled out. As you can imagine, this system favors those with deep pockets quite heavily since they could simply outbid the rest of the competition quite easily. What’s more, there was another flaw in the algorithm in that advertisers could bid for any keyword imaginable. Therefore, if you searched for a popular movie’s reviews you could have been shown ads for a dishwasher on top of the page. Understandably, this sort of thing provides a poor experience to those browsing, and Google fixed all of this with a simple metric. This metric is called the Quality Score, and all of your campaigns should be designed with this in mind. The Q score is a great leveler for advertisers of all sizes since it minimizes the effect of big budgets and brand name recognition. If your Q score happens to be higher than that of a far larger competitor, your ad can be listed above theirs. How great is that? This is not to say that the amount of money you bid doesn’t matter. Far from it. It’s just that the ad placement is determined by the combination of the Q score and your bid, which gives you a far better chance of duking it out with the big boys. Before we get into looking at how the quality score is determined, though, I need to bring you up to speed on some jargon.

First, we have the term “impressions.” This is simply the number of times your ad was displayed when people searched for that relevant keyword. In other words, how many people saw this ad? There could be multiple views in there, but generally, impressions are a pretty good metric to estimate your ads’ reach. When a person clicks on your ad you get charged, as I mentioned earlier. Dividing the number of clicks by the impressions gives you a percentage called the Click Through Rate or CTR. This is one of the huge metrics in PPC ads, so keep this in mind. So now you’re paying for your ads, what is the cost you’re incurring for simply displaying those ads? Well, this is what the Cost Per Mille or CPM is. The CPM is the amount you’ve spent (thanks to people clicking on your ads) per thousand impressions. Now that we’ve got this out of the way, let’s get back to the auction house. When you setup your campaign for keywords, you will need to fix a budget and a bid. Google exists to make money, so naturally, it is going to favor those who bid more, assuming all else is equal. What if you’re the highest bidder by a mile? Well, Google won’t charge you the entire amount because it optimizes for the bid size with regard to impressions. My point is that you won’t always be spending the exact bid amount. You won’t spend more than that amount for sure. Google Ads campaigns run on autopilot, and you fix a maximum budget per day. Successful advertisers spend a small amount upfront testing various keywords and then scale the ones that are successful into larger campaigns. The second half of the ad placement puzzle is the Q score. Every ad you run will have a Q score assigned to it by Google; the higher the better. What are the factors that go into determining the Q score?


Quality Scores


Briefly, here are the things that Google takes into account:

1. Relevance

2. CTR

3. Account history

4. Landing page bounce


Relevance is simply an internal score each keyword is given with regard to what the user is searching. For example, if someone searches for “best laptop accessory,” a keyword such as “best smartphone accessory” is not as relevant as “best external hard drives” and so on. Therefore, it is very important that when you setup your keywords, you need to make them relevant to what your customers might search for. The next factor is the CTR. Simply put, how effective is your ad when it comes to people clicking on it? The higher the CTR, the more Google respects your ad since this is clearly more relevant to the audience than your competitors’ ads. Interestingly, as your account gets older, Google will project your past CTRs into the future and if they’re good, you might even get a head start. This is what the account history is all about. The longer you’ve been doing this, the better Google can determine whether you actually know what you’re doing. If you’re good at it, your new ads will start off with the same effective CTR (as projected by Google) as your old ads despite not having received any clicks. This is not a huge factor, but it does make a difference if you’re good at designing high CTR ads. The other factor within the account history metric is whether you actually sell good products or if you’re espousing something fraudulent.

The last factor is a very important one and refers to what happens when people click on your ad and view your landing page. If they tend to immediately leave the page and go back to Google, this is called a bounce. The lower the bounce rate, the more relevant your ad and thus the higher your Q score is going to be. This is why the design of your landing page needs to be clean and easy to navigate. If the user gets confused or doesn’t get a good idea of what’s going on, they’re likely to bounce and Google will penalize you for this. All of these factors are taken together, along with your maximum bid, and Google spits out a metric called the AdRank. The calculation is straightforward. It is simply the product of your Q score and your maximum bid. Now here’s the nerdy bit. Before deciding to display your ad, Google takes the Q score, your bid, and your AdRank into account and then decides how much you should pay per click. This is called your Cost Per Click or CPC. Your CPC is therefore not necessarily all about your maximum bid. If your quality score is high enough, you will end up paying less and have your ad shown higher than your competitor who bids far more than you. Your CPC is your profit indicator since it literally tells you how much you’re paying for a click and you can compare this directly to your profit margins. Get too many useless clicks and you’ll end up wasting money. You will need to constantly monitor your campaigns since it is easy for spending to get out of hand. In fact, let’s look at budgetary concerns now.


Budgeting


Remember that you’re not running ads for a charity. Your ultimate aim with these ads is to make money. Therefore, your end goal should always be to sell a product or a service, which will help you recoup your money quickly. This might sound unbelievable, but there are a lot of companies that spend tons of money on AdWords only to have people fill out a form that indicates interest or sign up for some low commitment email list. This is a surefire way to lose money since daily costs can add up no matter how low your maximum daily limit is. Therefore, always keep your end goal in mind when designing your campaigns. The key metric to measure here is your conversions. The CTR is one half of that since it indicates how many people are clicking onto your website or the product page.

Thankfully, figuring out your ad budget is simple. You start by defining your profit margins. Let’s say you earn $10 per sale in profit. Next, you need to estimate a conversion rate. This is different from the CTR, which is the number of people who click your ad. Here, I’m talking about the number of people who buy your product once they land on your page. A decent number to shoot for, if you haven’t done any sort of PPC ads before is 1%. So one out of every ten will buy your product. Every click you receive is coming from Google, so you’ll need to pay them. So how much of your profit are you willing to spend on ads? Is $3 (30%) fine? Is it $5 (50%)? And so on. Remember to take your other costs into account as well before deciding on this number. Multiply all of these together, and you will get your Max CPC or the maximum amount you can pay per click to maintain your margins. Max CPC= 10*0.01*0.3 = $0.03 per click. (profit*conversion rate*percentage of gross profit spent on ads) Now, with this in hand, you can determine what your maximum budget should be. Remember that you should test your ads first to see if these assumptions hold. Therefore, aim for a small campaign to generate a few clicks and once you receive some data, you can focus more on the keywords that work and spend more on them for better results. An ideal time period to test is 10 days. Let’s say you will receive twenty clicks per day, which is a realistic number. Of course, this depends on your niche but this is a good average across niches. So your per day maximum spend is: Max CPC * Number of clicks = 0.03*20 = $0.60 per day. Total Budget for 10 days = 0.6*10 = $6 If you want to run it for 30 days then your budget will be $18 and so on.


This is how Google Ads works.

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