Ever wonder how Google Adsense auctions the ad positions on your website or blog? How Adsense determines how much to pay on a cost per click (CPC) basis is determined by several calculations. It's not as simple as you might think.
It is important to understand how Adsense ads are selected when they are displayed on your website. Every single time a page on your site is opened, a new auction is run for Adsense ads on that page. This ensures you are getting the best CPC or CPM possible.
Each advertiser has a set amount they want to bid. Let's say there are 3 ad slots available. Here is the max CPC amount that each Adsense advertiser is willing to pay:
Max CPC Bid | |
Advertiser A | $7.00 |
Advertiser B | $5.00 |
Advertiser C | $3.00 |
Advertiser D | $2.00 |
In the simplest version, the way Adsense is designed is that the top bidder only has to pay the max bid of the advertiser below them. So, following the chart above, Advertisers A, B, and C would get the slots, and what they would pay would look like this:
Max CPC Bid | |
Advertiser A | $5.00 |
Advertiser B | $3.00 |
Advertiser C | $2.00 |
Now, let's dig deeper. If you have the above concept down, then we can move on to the Adsense Ad Rank.
Here is how Google determines its Adsense ads positions:
Max Bid x Quality Score of the ad = Ad Rank
Highest ad rank = 1st Position
2nd highest = 2nd, etc.
Quality score is how well the ad performs.
Let's take another look at the original 4 advertisers with quality score of their ads and ad rank, with new positions, and all bids of $5.00:
Max CPC Bid | Quality Score | AdRank | Position | |
Advertiser A | $5.00 | 1 | 5 | X |
Advertiser B | $5.00 | 5 | 25 | 2 |
Advertiser C | $5.00 | 8 | 40 | 1 |
Advertiser D | $5.00 | 4 | 20 | 3 |
So, with such a low quality advertisement, Advertiser A does not get placed. Advertiser C would get the top slot, followed by B,then D. Now, if they all bid the same amount, then how does Adsense actually determine each CPC bid?
We are set up with another equation:
P1 x Q1 = P2 x Q2
This means that the ad with the highest ad rank only has to pay enough to beat the ad that came in second. Thus, price for ad 1 multiplied by quality score equals price for ad 2 multiplied by quality score. So, the objective is to find out what the actual CPC is:
Simple math gives us this final equation:
P1 = (P2 x Q2) / Q1
Or, the price actually paid for the ad will be the Ad Rank of the ad below divided by its own quality score. So, here is what the final result would look like:
Max Bid | Quality Score | Ad Rank | Actual CPC | |
Advertiser C | $5.00 | 8 | 40 | $3.13 |
Advertiser B | $5.00 | 5 | 25 | $4.00 |
Advertiser D | $5.00 | 4 | 20 | $1.25 |
Advertiser A | $5.00 | 1 | 5 | X |
A = 25/8 ($3.13)
B= 20/5 ($4.00)
C= 5/4 ($1.25)
This goes to show that ad position does not guarantee the highest CPC. Hopefully this help in understanding how Adsense calculates its CPC costs, and determines ad ranking and ordering.
This video is a GREAT help and explains this perfectly:
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