Competitor Analysis: How Competitors Influence Advertising Costs

One of the great things about AdWords is that it gives smaller advertisers a chance to compete with big players by maintaining a high level of quality throughout their account and website. If the amount advertisers paid for clicks on their ads was based solely on bids, AdWords would be a monopoly auction in which the largest advertisers would bid to maintain all the best real estate.

AdWords avoids this by basing cost-per-clicks not just on bids, but on the quality of the advertiser’s website and a high degree of relevancy between keywords, ad text, and the specific landing pages to which the ads point.

In order to quantify these qualities, AdWords uses an attribute called Quality Score. This is a proxy metric for both quality and relevance, and it exists first and foremost to ensure a high degree of user experience. The connection between relevance and quality score is key here because Google wants to ensure that when someone searches for a product or service on Google Search, they’ll see ads directly related to that product or service. Quality Score is ranked on a one to ten basis.

 

How Quality Score Affects CPCs

Your actual cost-per-clicks are based on a calculation called Ad Rank. The higher the Ad Rank, the higher the ad will appear in the search results.

Your Ad Rank is: Your CPC bid X Your Quality Score

CPC of $2.00 X QS of 8/10 = Ad Rank of 16 (2 X 8)

Your Ad Rank actually plays a huge part in your competitor’s CPCs, and vice versa. Remember, your maximum cost-per-click bid is usually the same as the amount you’ll actually pay when someone clicks on your ads. The latter is determined by how much competition you’re facing in the auction and the Ad Rank of your competitors. Here’s where it gets interesting:

Your actual CPCs = Ad Rank of the advertiser to beat / Your Quality Score + $0.01.

This gets a little confusing. Take a look at this example:

 Max CPC bid
Quality Score
Ad Rank
Actual CPC
Advertiser 1$2102015/10 + $.01 = $1.51
Advertiser 2$35158/5 = $.01 = $1.61
Advertiser 3$4285/2 + $.01 = $2.51
Advertiser 4$515Highest Bid

As you can see, the advertiser in the top position was not the advertiser who paid the most to show in the auction. In fact, because the winning advertiser’s Quality Score was so high, she paid the lowest cost-per-click out of all four!

Hopefully this example underscores the importance of Quality Score on Ad Rank, and ultimately, how competitive you can afford to be in the AdWords auction.

 

The Importance Of Sitelinks

Google recently updated it’s Ad Rank formula to heavily consider the “estimated impact from ad extensions and formats”. This means the following things:

  • Google really wants you to use ad extensions because they make your ads look bigger.
  • The bigger your ads are, the more likely it is that folks will click on them and the more ad revenue Google will bring in. This change likely represents Google’s impatience at the pace of advertisers incorporating sitelinks.
  • Sitelinks are no longer optional — avoiding them will have a direct affect on your Ar Rank
  • This makes AdWords more competitive in general because as more advertisers adopt sitelinks Ad Rank will improve across the the board, resulting in higher CPCs.

 

Conclusion

  • Quality Score has a direct affect on how much you pay-per-click
  • For this reason, it’s critical to follow best practices for keeping Quality Scores high
  • Your actual cost-per-clicks are determined in part by your competitor’s Ad Rank
  • Sitelinks are now an important part of Ad Rank calculation

 

References