It’s kind of nifty how forthcoming Google has been with the transparency lately. For the longest time, trying to get anything out of them was like trying to squeeze a nickel out of Ed McMahon. The latest explanations of how things work is a blog post describing how quality scores work and why the highest bidder doesn’t always get highest placement in the sponsored results.
Hal Varian, Google’s Chief Economist, at the official Google Blog uses a simple analogy of two sellers with different offerings who might use the same keywords: a guy who sells actual jets, and a guy who sells models of jets. The guy who sells real jets bids a lot more per click than the guy who sells models because leads are obviously worth a lot more to him.
However, the jet-seller’s links don’t get clicked as often as the model-seller’s, which puts Google in a conundrum that’s solved with the quality score. Google multiplies the maximum cost per click of an ad by the quality score, which is determined by historical click-through rates, quality of landing page, keyword relevance, ad relevance, and performance in a geographic area, among other factors, to determine placement.
Thus, the lower bid could achieve higher placement because it’s more likely to be clicked, which, in theory, accomplishes three things: makes Google more money, provides a relevant lead to the advertiser, and provides a relevant direction for the searcher.
“The quality score gives search engines a way of aligning the incentives of the buyers, the sellers, and the viewers of ads,” writes Varian. “The search engine wants to sell ad impressions, but advertisers want to pay for clicks. The solution is for advertisers to bid on a cost-per-click basis, while the search engine estimates the total value of the ad over time: bid per click times the expected number of clicks.”
