Background: What It Means To Bid

Google AdWords, MSN, and Facebook all operate on the same principle: they all take advantage of an auction system.

While the amount you bid per click is the maximum amount you are willing to pay, 95% of the time, you do not wind up paying your bid. You usually will wind up paying less or significantly less than your bid for each click.

Why is this?

Google uses a combination of your bid and quality score to determine the ad rank of your particular ad for the particular search conducted by the user.  To do this, a quality score is calculated for your ad for each search. That quality score is then multiplied by your bid to determine the ad rank of your ad. The higher the ad rank, the higher the position. You then pay the ad rank of the ad below you divided by your quality score.

Quality Score x Max Bid = Ad Rank

Cost Per Click = Ad Rank of Ad in Position(a-1) / Quality Score, where a is the position of your ad

As a result, the cost per click of your ad will usually be less than what you bid for it.



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