How Bidding Works in PPC [Part 3/5]

This article is part 3 in a 5-part series.

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How does bidding work in the PPC world? When you think of bidding, you likely think of an auction. Maybe an antiques auction, a car auction, ebay…

In PPC you are also bidding, but for ad space instead of that rad, vintage toaster.

I’m winning this...and it will probably burn my house down 😐

In simple terms, if you bid higher than someone else, your ad will appear above theirs, and you’ll pay more for clicks.

However, the way Google determines ad positions is not quite that simple.

How The Google Ads Auction Works:

  1. A user searches for something on Google
    • Hank searches for “Used Books Online”
  2. Google finds all accounts with a closely matching keyword
    • 10 different Google Ads accounts with “Used Books Online” keywords are considered to show an ad
  3. The ads with the highest ad rank are shown.
    • Ad rank is the combination of the advertiser’s bid, and the ad quality (ad relevance & landing page relevance). Other “contextual signals” are also considered to some degree, like the searcher’s device model, the ad format, etc.
    • Our ad shows in position 2 at the top of Google because we rock!

So in reality, the auction looks more like this:

Google Adwords Bidding

Or more simply:

So, there are two basic methods to increase your ad’s visibility on Google: Bidding, and improving ad quality.

For now, we’ll focus on the bidding portion to better understand how it works. We will also cover the various bidding options that are available.

Manual Bidding

Manual bidding on Google Ads give the advertiser the most control.

You set a custom bid, or a maximum dollar amount that you are willing to pay for each click.

Each keyword has its own unique bid amount, and you will never pay more than that dollar amount for each click.

Example scenario:

Keyword: “Used Books Online”

Bid: $1.50 (the amount I am willing to pay for one click)

Actual cost per click: 0.85c (actual cost per click is usually much lower than your bid, but not always!)


This seems like the most logical bid strategy, so many advertisers choose to use manual bidding exclusively.

However, it has its pros and cons:

Pros of Manual Bidding

  • Absolute control of your bids
  • Pacing your budget is more manageable
  • No “learning period”
  • No minimum conversion thresholds

Cons of Manual Bidding

  • Can become overwhelming to manage, especially in large accounts
  • Requires (a lot) more analysis and bid updates
  • Cannot consider certain user factors (weather, device model, browser, etc.)

Smart Bidding

Smart bidding is like saying, “Hey, Google. I don’t want to worry about setting my own bids. You do it for me. BUT, make sure you hit my goals, k thanks!”

Google Smart Bidding

Smart bidding takes away most of the control from the advertiser and allows Google to set a bid for you. As a result, some advertisers are uncomfortable using smart bidding. However, Google has an interest in your success. So, Smart Bidding is a pretty good option for many advertisers.

With manual bidding, the same bid is applied to every auction. With smart bidding, each keyword will have a unique bid set for each auction based on a ton of signals. These signals include browser, operating system, language, demographics and more. See the full list here.

Smart bidding also uses machine learning to get smarter over time. Instead of setting a dollar amount that you’re willing to pay per click, you set another goal for Google to achieve for you within your daily budget. It simplifies the process of bidding, and lets the advertiser focus on optimizing other aspects of the account.

The first step in smart bidding is to choose a goal. Choose whether you want to focus on getting more clicks, more impression share (ad coverage), more conversions, or more conversion value (revenue). Let’s start with clicks.

Optimize For Clicks

This smart bidding option will get the most possible clicks on your keywords without exceeding your daily budget.

Google Smart Bidding Optimize For Clicks

This option allows us to set an optional Maximum CPC bid limit. If we set one, Google will never bid higher than this amount per click on any of the campaign’s keywords.

Beyond that, Google is free to set bids across our entire campaign between 0.01 and your Max CPC with the goal of “maximizing clicks” within the daily budget.

In theory, Google will find the keywords with the cheapest auctions, and get the most clicks out of them. 

Pros

  • Can help increase site traffic rapidly
  • If your keywords are highly focused, it can be effective

Cons

  • Keyword lists better be highly focused! Risk of misallocating budget to bad keywords.
  • Tends to put more budget into lower cost keywords
  • Cannot factor in true value of each click

Optimize For Impression Share

Impression share is important. It is the metric that determines how often your ads are shown, when they were eligible to show. So of all the times people searched for “used books online”, how many of them saw our ad? Maybe half the time? 25% of the time?

This smart bidding option will do it’s best to reach a target percentage impression share while maintaining your daily budget.

Google Smart Bidding Optimize For Impressions

You have more optional input for this strategy.

Where do you want your ads to appear? Anywhere on the search results page? Top of results page? Or the very top of the results page (position 1). This input will determine how aggressively Google will set your bids.

You can also set a % impression share target. I would recommend starting this lower, maybe 25%-50%. This is the percentage of times your ad will show when it is eligible to be shown.

You can also set a maximum CPC limit, as with the clicks model.

Pros

  • Will increase your ad’s visibility
  • Great for branding
  • Can help you out-rank your competitors consistently

Cons

  • ROI will often be inconsistent
  • Does not factor in conversion or revenue

Optimize For Conversions

This is where smart bidding can become very powerful: when you pair Google’s massive data and machine learning capabilities with your own conversion tracking. If you’re unfamiliar with conversion tracking, start to learn about it here.

A conversion can be a lead, a sale, or even just an email signup. Google makes it easy to add code to your website and start tracking conversions within an hour.

Google Smart Bidding Optimize For Conversions

This smart bidding option allows you just one user input, target CPA.

This is the average “cost per acquisition” you would like Google to target. If your business has determined that an average conversion is worth $50, then you could set your CPA to $50.

Some conversions may cost more, and others may cost less. The smart bidding campaign will attempt to average $50 per conversion over time while maintaining your daily budget.

Pros

  • Highly effective when CPA setting is realistic
  • Considers actual user action on your website
  • Scalable with budget increase

Cons

  • Must have historical conversion data to be eligible
  • Cannot set a maximum CPC limit
  • Will often burn through low-budget campaigns quickly

Optimize For Conversion Value (Most Advanced)

This strategy is similar to the conversion setting, but allows a different input. Instead of specifying a CPA goal, you may specify an ROAS goal.

This requires that you have conversion tracking enabled, and that you also have conversion value tracking.

If you have different priced products on your website, consider learning more about tracking conversion value.

For example, if you have one product that is worth $15 and another that is worth $250, Google can differentiate between these two types of sales. Target ROAS will attempt to meet your ROI goals.

Google Smart Bidding Optimize For Conversion Value

Pros

  • Gives Google the most signals to make smarter bidding choices
  • Can differentiate the value of each conversion
  • Highly effective in larger accounts with lots of data

Cons

  • Requires more advanced tracking setup
  • Must accumulate historical conversion data to be eligible
  • Cannot set a maximum CPC limit

How to Choose the Right PPC Bidding Strategy

Google Ads Smart Bidding Types
Google Ads Bidding Options

All that is left is to choose the right bidding strategy to start with.

For our bookstore account, we will start with the “Optimize for Clicks” smart bidding strategy, and here’s why.

This account is brand new. We have no history, and no real sense of how much each click will cost or how often to expect conversions. We’ll set a max CPC limit of $2.50 and let Google work within the confines of our daily budget for about a week.

After the account starts getting some clicks, we may consider moving to the Optimize for Conversions option to let Google factor in real sales numbers.

In the end, it’s best to start simple and learn the nuances of your specific industry before graduating to a more complex bidding strategy.


Now that you understand how the bidding process works, it is time to learn how to navigate your account effectively.

Next: Navigating Your PPC Account >>

<< Previous: Starting Your PPC Account


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