Google Adwords Auction
The Google ad auction is how Google determines which ads will show and how they’re positioned on the search engine results page. Google Ads uses an auction system to rank the ads that appear on the search results page, and to determine the cost for each ad click.
The order in which ads appear on the page is based on a calculation we call Ad Rank. Google value proposition is delivering the most relevant answers to your questions. So they created an auction around relevance and authority, benefiting those that have the most relevant ads and web content in relation to their ads.
Google must provide a good experience for users and provide value to advertisers otherwise both would not be repeat customers.
How does Google determine how much you pay and where your ad appears?
Google looks at two key factors to determine your ad rank: Maximum Bid and Quality Score. Ad Rank equals your cost per click bid multiplied by quality score. The best combined rank in the auction gets the best position.
This measures how relevant and useful your ad is to the user. Elements such as Click thru rate CTR and Ad relevance impact your quality score. Quality score is graded on a scale of 1 to 10. The higher the score the better.
How does google determine what you pay?
You pay the minimum amount you can pay for the position you win if your ad is clicked on. Your price equals the ad rank of the person below you divided by your quality score
This system encourages and benefits advertisers with the most relevant ads , websites and campaigns. In essence google penalizes bad websites and poorly written ads. as such their customers are looking for the best information.
Understand the second-price auction
The Google ad auction is a second price auction. That is an auction where the highest bidder wins but the price paid is the next lowest bid. Googles second-price auction is based only on bids, so the advertiser doesn’t have to pay their full bid. They only have to pay $0.01 more than the amount of the next highest bidder. This type of auction gives bidders an incentive to bid true value.