I highly encourage you to follow step by step rather than jumping around through this article, as it is important that you fully understand each aspect of AdWords functionality in order to understand how ad rank is determined.


These are some of the questions I intend to answer for you today.

  • How does Google handle so many advertisers and know exactly which ads to show and when?
  • How are my ads compared to others?
  • What is the significance of a “quality score”?
  • How does Google determine exactly how much to charge me for my ads?

With this information you can potentially decrease the amount you spend on clicks by increasing your quality score.

What ads are we talking about?

We are talking about the sponsored results listed at the top and to the right of the search results that appear when you perform a search on Google (see image below).

AdWords Ranking

The order of these sponsored results is based on the following three factors for each ad:

  1. Maximum Bid
  2. Quality Score
  3. Competitors

Maximum Bid

Bidding is a pretty simple concept when you look at it alone. Whoever bids the highest wins. However, the dollar amount an advertiser is willing to spend is not the only thing Google cares about.

Let’s say we have four advertisers that are all bidding different amounts, but we have only three ad slots available. You will notice in the image below that the fourth advertiser is bumped from the sponsored results since he has the lowest bid. Again, this is in an auction environment rather than actual Google AdWords ranking.

AdWords Max Bid

Google also cares about the quality of the ads being presented. After all, their concern is for the user that is searching, NOT the advertiser; so Google throws another variable into the mix called the quality score.

Quality Score

The quality score prevents irrelevant ads from displaying. This benefits both users and advertisers as users are not shown ads for things they are not interested in and advertisers can more accurately target their consumer market.

Google scores your ads with a number between one and ten. This score is based on three things.


  1. Click-through-rate (CTR) – the percentage of users that click on your ad compared to the number of users that are shown your ad. When a user clicks on your ad Google counts that click as a “vote” from that user saying that your ad is actually good. The CTR of an ad is overwhelmingly more important than the other factors that compile a quality score.
  2. Landing page – the page your ad links to. The significance of the landing page is that Google wants to make sure the content matches the ad. Some other factors are page errors and the speed in which your page loads.
  3. Relevance – how relevant your ad is to the user’s search query. The more relevant the ad you create is to the keywords used in a search, the higher your quality score.

When you purchase search engine optimization services from Allmywebneeds.com, we use natural optimization to increase the quality of your landing page and we use search engine tools and marketing techniques to increase ad relevance and your click-through-rate (CTR).

Ad Rank

The ad rank is a number that determines where you should be placed relative to other advertisers. This number is very simple to calculate. All you have to do it multiply your max bid with your quality score to get your official ad rank.


Example: Determining Ad Rank

If we take the four advertisers from (the Maximum Bid section) above and multiply their max bid and quality scores we get their ad rank. The quality scores in the diagram below were chosen at random for this example and have not been affected by any other factors.

Calculate Ad Rank

Now that we see the actual ad rank for each of these advertisers let’s take a look at their new slot positions.

Calculate Ad Rank Positions

As you can see, the order of each ad has changed based on the highest ad rank rather than the highest bidder.

Actual Bid vs. Max Bid

How do we determine how much we are actually spending on a per-click basis? So far we have talked about three things:

  1. Max Bid
  2. Quality Score
  3. Ad Rank

The final thing to understand about the Google AdWords auction process is how an “actual bid” is determined. When you set your maximum bid you are not choosing to pay that amount per click, but rather you are choosing to stop showing your ad after the cost has gone over your preset “max bid” limit.

Example: Establishing the Actual Bid

In this example, we have three advertisers that are now bidding the same amount ($4.00) but with varying quality scores. Even though their maximum bids are the same, they will not each end up paying the same amount.

Calculating Actual Bid

This next part is probably going to sound overly complicated, but keep reading and comparing the diagrams and it will hopefully make sense.

Remember, the first thing being calculated is ad rank to determine the order in which ads should be shown. Once that has been established Google knows which ads to show in what order, but has not yet determined the cost of each ad for their respective owners.

The actual bid is determined by two factors:

  1. The ad rank of the ad below yours
  2. Your ad’s quality score

To get the actual bid, you divide the ad rank of the ad below yours by your ad’s quality score.

Calculating Actual Bid Result

Notice that the actual bid for the top advertiser in this example is set to $3.00; or twenty-four divided by eight.

This process continues downward on nearly an infinite scale as there are countless competitors on AdWords. However, the last advertiser would simply pay the minimum bid required by Google for that particular ad placement as show below.

Calculating Actual Bid Min Bid

As you can see there are a number of factors that come into play with the auction process of Google AdWords. Hopefully my explanation here is enough to help you understand exactly how ad placement and actual bidding are determined. If you would like to watch a video to reinforce these ideas, please click here. Many of the images shown in this explanation were provided by this video.

What now?

Do you want someone else to manage your AdWords campaign? Request a quote today!