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The Trick To Understanding AdWords

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Andy Black

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The trick to understanding AdWords?


THINK LIKE GOOGLE.



Imagine four businesses are all competing for the 6th ad position for search term “hotels new york”.

Let’s say they are Andy Inc, Peter Ltd, The Cynthia Group, and Jordan Consulting.

Obviously, we’re small fry compared to Booking.com and Expedia.com, who are in position 1 and 2 respectively.

Those big guys have direct deals with lots of hotels and get a good earning-per-click for each click they buy.

They can therefore afford to pay the $5 cost-per-click (CPC) for positions 1 and 2, and not many other businesses can compete with them.

Their ads therefore show 100% of the time that someone searches for “hotels new york”.

Their Impression Share is 100% in Google parlance.

For us smaller fry, we can only afford to pay $1 per click, so are relegated to scrapping for position 6 on the page.

If we’ve all got an equal click-through-rate (CTR) of 1%, then Google is going to earn $1 from each us for each 100 times they show each of our ads.

Let’s say that there are only 400 searches in a particular day.

Google earns the same from each of us for every 100 times they show our ad in position 6.

So Google has no preference who’s ad they show, so they show us all equally.

We each get our ad shown 100 times out of the 400 (a 25% impression share), and Google earns $1 from each of us.

Now if The Cynthia Group crafts a more appealing ad that gets them a 2% CTR, then all of a sudden Google is going to earn $2 for every 100 times they show her ad.

Google wants everyone to write better ads and get good CTRs.

This means that users will find their search engine more useful, and the ads more relevant. (Remember they only get paid when people click on the ads… ahem.)

Google are smart, so have publicly told everyone that they will be rewarded with a lower CPC if they can increase their CTR.

They could drop Cynthia’s CPC down to $0.50 and make $1 for every 100 times they showed her ad.

The same as before.

Cynthia would love that.

But Google are smart, so they drop Cynthia’s CPC down to $0.80 instead so that they earn $1.60 for every 100 times they show Cynthia’s ad.

Cynthia is still pretty pleased with that.

Geting a lower CPC by increasing ad CTR is a great incentive to advertisers to improve their campaigns, make the Google SERP a nicer place for users, and put more cash in Google’s pocket.

But there’s more rewards to be heaped upon Cynthia.

It’s an additional, unpublicised, benefit that comes from increasing your ad CTR.

That becomes obvious when you think like Google.

So four of us are competing for position 6.

Andy, Peter, and Jordan have a 1% CTR, and are paying $1 CPC.

Cynthia has a 2% CTR, and is paying $0.80 CPC.

Google makes $1.60 for every 100 times they show Cynthia’s ad, and $1 for every 100 times they show ads for Andy, for Peter, and for Jordan.

It no longer makes sense for Google to show all our ads equally.

Maybe they decide to show Cynthia’s ad twice as often now?

So her ad now shows 200 times out of the 400 times in the day.

All of a sudden Cynthia has quadrupled her traffic.

Not only has she doubled her CTR to 2%, but her impression share has doubled from 25% to 50%.

That’s awesome for Cynthia.

(Note that if Cynthia was happy with the $1 CPC, she could increase her bids now and go back to paying $1 CPC. Increasing her bids would maybe put her into ad position 5, which will increase her CTR slightly to 2.5%. Of course she’s not going to be rewarded for this higher Ad CTR since Google expects a higher CTR for being in a higher ad position. Instead, Cynthia’s campaign performance is now going to be compared with the 2 other people who are competing for position 5. So it’s game on again.)

Even if Cynthia didn’t push her bids, the results are not so awesome for Andy, Peter, and Jordan.

Poor Andy, Peter, and Jordan have lost traffic.

They were getting 100 impressions a day, an equal 25% of the 400 available impressions.

They have now been squeezed down to a third of the remaining 200 impressions that Cynthia doesn’t get.

That’s now 67 impressions a day each.

Yikes.

Traffic is falling off a cliff.

What’s happened to our quality score?

Let’s call Google.

They say we need to improve our quality score.

…increase our relevance.

…bid more too.

Gosh, this is so complicated.

Let’s just bid more and pay more per click.

The Moral of the Story
I hope you made it this far and that the above made sense.

If it didn’t make sense, then that’s my bad for not explaining it well.

Because it’s actually quite simple.

Google makes money from advertisers competing for each ad position.

They probably calculate it as the revenue per thousand times they show our ad, rather than every 100 times they show our ad (as I used in the story above).

This you will know as their revenue-per-thousand-impressions (RPM).

So what’s Google’s RPM?

That’s our cost-per-thousand-impressions (CPM) of course.

You want to master AdWords?

Look at your CPM, as that’s Google’s RPM.

Make this higher for the same ad position by getting a higher CTR.

Then Google will love you.

And likely show your ad more often (aka increase your Impression Share).

Sooooo… stop stressing about your Quality Score metric.

Keep an eye on your CPM and Impression Share metrics instead.



EDIT: Related video

 

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Speed+ excellent explanation
 
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Andy Black

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Vigilante

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We do more by 9AM than most people do in a full day.
 

Vigilante

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Google search only vs. extended network from search partners? I have always been of the impression that the extended network was nebulous as it is hard to see, and hard to track. Your thoughts on the effectiveness of including the extended network in the adwords campaigns?
 
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Andy Black

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Google search only vs. extended network from search partners? I have always been of the impression that the extended network was nebulous as it is hard to see, and hard to track. Your thoughts on the effectiveness of including the extended network in the adwords campaigns?
I'd start with Search Partners disabled. It can bring in good traffic, but more often than not it's not worth it.

When I get round to it I'll write something up on the inside to explain what I know about Search Partners and some of the shenanigans they can get up to.

From the how-to guide posted in the Speedway Forum:
 
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Andy Black

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lazaralex

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The trick to understanding AdWords?


THINK LIKE GOOGLE.



Imagine four businesses are all competing for the 6th ad position for search term “hotels new york”.

Let’s say they are Andy Inc, Peter Ltd, The Cynthia Group, and Jordan Consulting.

Obviously, we’re small fry compared to Booking.com and Expedia.com, who are in position 1 and 2 respectively.

Those big guys have direct deals with lots of hotels and get a good earning-per-click for each click they buy.

They can therefore afford to pay the $5 cost-per-click (CPC) for positions 1 and 2, and not many other businesses can compete with them.

Their ads therefore show 100% of the time that someone searches for “hotels new york”.

Their Impression Share is 100% in Google parlance.

For us smaller fry, we can only afford to pay $1 per click, so are relegated to scrapping for position 6 on the page.

If we’ve all got an equal click-through-rate (CTR) of 1%, then Google is going to earn $1 from each us for each 100 times they show each of our ads.

Let’s say that there are only 400 searches in a particular day.

Google earns the same from each of us for every 100 times they show our ad in position 6.

So Google has no preference who’s ad they show, so they show us all equally.

We each get our ad shown 100 times out of the 400 (a 25% impression share), and Google earns $1 from each of us.

Now if The Cynthia Group crafts a more appealing ad that gets them a 2% CTR, then all of a sudden Google is going to earn $2 for every 100 times they show her ad.

Google wants everyone to write better ads and get good CTRs.

This means that users will find their search engine more useful, and the ads more relevant. (Remember they only get paid when people click on the ads… ahem.)

Google are smart, so have publicly told everyone that they will be rewarded with a lower CPC if they can increase their CTR.

They could drop Cynthia’s CPC down to $0.50 and make $1 for every 100 times they showed her ad.

The same as before.

Cynthia would love that.

But Google are smart, so they drop Cynthia’s CPC down to $0.80 instead so that they earn $1.60 for every 100 times they show Cynthia’s ad.

Cynthia is still pretty pleased with that.

Geting a lower CPC by increasing ad CTR is a great incentive to advertisers to improve their campaigns, make the Google SERP a nicer place for users, and put more cash in Google’s pocket.

But there’s more rewards to be heaped upon Cynthia.

It’s an additional, unpublicised, benefit that comes from increasing your ad CTR.

That becomes obvious when you think like Google.

So four of us are competing for position 6.

Andy, Peter, and Jordan have a 1% CTR, and are paying $1 CPC.

Cynthia has a 2% CTR, and is paying $0.80 CPC.

Google makes $1.60 for every 100 times they show Cynthia’s ad, and $1 for every 100 times they show ads for Andy, for Peter, and for Jordan.

It no longer makes sense for Google to show all our ads equally.

Maybe they decide to show Cynthia’s ad twice as often now?

So her ad now shows 200 times out of the 400 times in the day.

All of a sudden Cynthia has quadrupled her traffic.

Not only has she doubled her CTR to 2%, but her impression share has doubled from 25% to 50%.

That’s awesome for Cynthia.

(Note that if Cynthia was happy with the $1 CPC, she could increase her bids now and go back to paying $1 CPC. Increasing her bids would maybe put her into ad position 5, which will increase her CTR slightly to 2.5%. Of course she’s not going to be rewarded for this higher Ad CTR since Google expects a higher CTR for being in a higher ad position. Instead, Cynthia’s campaign performance is now going to be compared with the 2 other people who are competing for position 5. So it’s game on again.)

Even if Cynthia didn’t push her bids, the results are not so awesome for Andy, Peter, and Jordan.

Poor Andy, Peter, and Jordan have lost traffic.

They were getting 100 impressions a day, an equal 25% of the 400 available impressions.

They have now been squeezed down to a third of the remaining 200 impressions that Cynthia doesn’t get.

That’s now 67 impressions a day each.

Yikes.

Traffic is falling off a cliff.

What’s happened to our quality score?

Let’s call Google.

They say we need to improve our quality score.

…increase our relevance.

…bid more too.

Gosh, this is so complicated.

Let’s just bid more and pay more per click.

The Moral of the Story
I hope you made it this far and that the above made sense.

If it didn’t make sense, then that’s my bad for not explaining it well.

Because it’s actually quite simple.

Google makes money from advertisers competing for each ad position.

They probably calculate it as the revenue per thousand times they show our ad, rather than every 100 times they show our ad (as I used in the story above).

This you will know as their revenue-per-thousand-impressions (RPM).

So what’s Google’s RPM?

That’s our cost-per-thousand-impressions (CPM) of course.

You want to master AdWords?

Look at your CPM, as that’s Google’s RPM.

Make this higher for the same ad position by getting a higher CTR.

Then Google will love you.

And likely show your ad more often (aka increase your Impression Share).

Sooooo… stop stressing about your Quality Score metric.

Keep an eye on your CPM and Impression Share metrics instead.



EDIT: Related video


Great Post Andy! Thanks a lot!
 

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