AdWords Changed The Actual CPC Auction Math!

Online Marketing PPC Forums AdWords Changed The Actual CPC Auction Math!

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    JT
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    In one of the accounts I manage on Google AdWords, I noticed that there was a major change in the auction math with severe ramifications that absolutely nobody on the internet is talking about.

    Let me tell you how I discovered it and what I learned. First of all, note the traditional math behind the Google Search auction.

    The traditional math is that you pay exactly what it takes to maintain your position in Google based on ad rank. Your ad rank, and the ad rank of everyone in the auction, was quality score multiplied by bid. Then after the auction is won you divide the amount you won it for divided by your quality score.

    So let’s say you bid $100,000 per click, which of course nobody would do. But then position 2 bids $20 per click. Their quality score is 5 and yours is 10. Their ad rank would be $100, so your winning ad rank was $100.01. You’d then pay $10.01 per click in first place for your quality score divided by your winning ad rank.

    Well I have an account where we bid very high for position 1 because we traditionally are profitable in that slot, and we don’t want our competition to start bidding there. But CPCs gradually increase over the last few months and we wondered if competition was just increasing or something.

    However the weird thing was that the “estimated first position bid” AdWords column was staying the same, yet the average CPC we paid was about twice that number.

    We started to wonder if maybe there was something broken there so we took a look at decreasing our bids to see what happens.

    We decreased our bids to about 40% lower, and guess what? Our CPCs dropped about 40%. We maintained first position, 100% impression share, and the same quality scores. Just by lowering our bids we cut out a 40% of costs and we didn’t lose CTRs or conversion rates either.

    So I did some digging and found that Google’s help doc on how much you pay per click were far more vague than they used to be. Looked like they slipped a major change behind the backs of the PPC community without telling us.

    Google's New Actual CPC Rules

    The most you’ll pay is what’s minimally required to hold your ad position and any ad formats shown with your ad, such as sitelinks.

    They don’t tell us the math on this, but apparently in order to jack up your CPCs, they can throw in a few extra ad extensions and call it a day. At least that’s my interpretation.

    However, CTRs didn’t decrease when I lowered AdWords CPCs in the account I manage. I don’t understand Google’s new math here, and I think they should be far more clear on this.

    Why They’d Do This

    Hopefully this doesn’t sound too conspiratorial, but I think its completely true. If I’m being honest, I think Google really wanted a way to capitalize on TCPA, target cost-per-acquisition bidding.

    An advertiser may insert they are willing to pay $100 per conversion, but Google could realistically deliver all of these conversions for $50 a piece by putting that advertiser in 1st position 100% of the time.

    So they needed a way to bring that average CPA up to $100. That way was to simply throw in some additional extensions that do not increase CTRs or conversion rates in a meaningful way and simply charge CPCs up to that maximum amount to hit that CPA.

    Until Google can come out with a more transparent picture of what their auction math is, I recommend taking all of those ad groups that are consistently in first position and switching back to manual CPC.

    Then, find that point where you’re bidding as little as possible while maintaining first position. In order to maintain first position, I’d set up automatic bidding rules to increase bids if your first position falls below a certain avg position threshold each day.

    I think you’ll find this will save you a lot of money.

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