Search Ads – Ad Rank and Actual Cost per Click

In the previous lesson, we have discussed the general functioning of the search ad bidding process introducing concepts such as ad rank and cost per click. In this exercise, I will ask you to put the process into practice through a simple example.

Setting

To better understand how bid amount and quality score determine the rank of an ad, consider the following example. In this example, four insurance firms (i.e., advertisers) are competing for three available ad slots for the keyword “cheap car insurance”.

The table below depicts the advertiser names, their maximum bids, and their quality scores, which are assigned by the search engine.

The Maximum Bid column represents advertisers’ CPC bid amount, and Google ensures that the advertisers will never be charged more than their bid amount. 

Since Google uses a generalized second-price auction approach, each bidder pays the bid amount of the next highest bidder. 

The Quality Score column indicates the quality of each ad (on a 1- to-10 scale) as determined by Google’s algorithms. Advertisers do not know the algorithms behind this quality score; they are kept secret by Google. 

Tasks:

In this exercise, you will be asked to (1) calculate the Ad Rank numbers for the four insurers, (2) to establish the ranking order for the three available slots, and (3) to calculate the actual cost per clicks (CPC) for the three insurers occupying the three available rank positions. Please provide your answers in the following assigned questions.