Introduction to Pay Per Click Advertising: Part 2

Introduction to Pay per click part2In Part 1 of Introduction to Pay Per Click Advertising, we discussed about the basics of PPC, major players and the key terms involved in it. But it is very important to understand how it works and  In Part 2 we are going to cover the architecture and the functioning process of Google Adwords. So lets get started:

Architecture of Google Adwords

Before creating your first ad campaign we will be understand the basic architecture of Adwords which will help us in creating a better campaign. The architecture can be divided into five levels as shown in the figure below:

Architecture of PPC Advertising

The process starts with Creation of Adwords account at the top most level. Your account and its settings comes at the top level. Below it comes the campaign. It signifies the main product/service line of your business. For eg: lets say we are a Insurance company then our campaign can be named as Insurance. The next level is occupied by Adgroup, it contains a set of ads with similar keywords. For eg: we can create two types of ad groups named Auto and Home Insurance under campaign. At the next level comes the ads which we want to display in display networks. If the Ad Group 1 is Auto Insurance then we can create two ads under this ad group named as Car and Truck Insurance. And last but definitely not last comes the keywords which are the most important factor in complete process. Choosing the right keyword can be the key to success. We can choose keywords like “Cheap Car Insurance” which fall under the ad category in architecture.

Google Adwords (How it works?)

Entities of Google AdwordsUnderstanding the complete process of Google Adwords is very important to create a successful campaign. If you understand this properly, you can save good money in your campaign. As the price which Google charges depends on lot of factors.

In general there are three parties involved in creating a ad. They are User, Advertiser and Google itself. The user wants to see the most relevant ads related to the query typed. The advertiser wants to be seen and clicked maximum times and Google is the authority responsible for providing best experience for users and Advertisers. The User is the most important entity in this process as both parties need to provide a good experience to the user.

Process of Adwords (Functioning)

The Google Adwords charges based on Pay Per Click and your this price is different for different keywords depending on the competition. More competitive keywords will cost you more than less competitive keywords but more competition also signifies good amount of traffic for those keywords. So keeping a balance between the competition and traffic is the most important thing if you are just starting out. There are lot of factors which are considered by Google before setting a Cost Per Click for your ad. So lets understand how it works:

1) Bidding (Understanding the auction): To run ads on Google you need to set an initial budget and ad group bids. Your bid is the maximum amount which you are willing to spend per click. By managing your bids, you may influence the amount of traffic your ads receive, as well as the Return on Investment they generate. With higher bids, your campaign is likely to receive more traffic while spending more money. With lower bids, your campaign is likely to improve its ROI, but receive fewer clicks and conversions.

  • Manual bidding: This is the default option to let you manage your maximum CPC bids yourself. You can set bids at the ad group level, or for individual keywords.
  • Automatic bidding: If you’re new to AdWords (or if you’re busy), we recommend this option. All you have to do is set a daily budget, and the AdWords system manages your bids for you, to bring you the most clicks possible within your budget.

2) Quality Score: It is a way of measuring the quality of your keywords by Google. Better your quality score, less you need to pay per click. We will discuss this in detail in actual bid section. Quality Score depends on three factors:

  • Click through Ratio(CTR): More the CTR, more will be Quality Score.
  • Landing Page: Landing page should be optimized according to the chosen keyword.
  • Relevancy: Your ad has to be relevant to your site and landing page for a good quality score.

3) Ad Rank: It is an value for determining where your ad will be shown on a page. It is calculated using Max bid and Quality Score.

Max. Bid * Quality Score = Ad Rank

Ad Rank is directly proportional to Max. bid and Quality Score, so to attain good Adrank, bid as high as possible and increase your Quality Score.

4) Actual Bid: There is a difference between your maximum bid and actual bid. Google will not necessarily charge your set maximum bid, it will only charge you a slightly greater amount than your competitors. Little confused? lets see an example for clarifications.

In the table below A, B and C are three advertisers bidding for same keyword. So the priority will be given to the advertiser with the highest Ad Rank and in this case it is Advertiser A. But the main question which arises is How to calculate Actual Bid ? Lets see how it is calculated.

Actual Bid AdwordsSuppose Advertisers A, B and C bid a maximum bid of $4 for the same keyword. A, B and C have Quality Score of 8,6 and 3 and correspondingly Ad Rank of 32, 24 and 12. The formula for calculating Actual Bid is:

Actual Bid = Ad rank of just lower competitor/Quality score of selected keywords

Lets consider A for first case, he has a quality score of 8 and Ad rank of 32 so its actual bid is calculated by dividing Ad rank of second competitor (in this case B) by Quality score of A. So actual bid comes out to be $3 although the maximum bid set was $4. Similarly you can calculate the bid for B and C.

You can also say Quality is inversely proportional to Actual Bid, that is one increase other will decrease and vice versa. For eg: If quality score of B increases from 6 to 7 then A has to pay 28/8 = $3.5 (because ad rank of B will be 4 * 7 = 28).


So in this post we covered the Architecture of Pay Per Click Advertising and How it works? This will help us in creatign a more useful campaign and save money by creating a good quality score. Now we are all set to start our first campaign which we will be covering in our next post that is Part 3 of this series. Please keep visiting regularly for Part 3 or subscribe to our updates. If you have any queries, questions or suggestions, please post it in the comments section below.


2 replies
  1. w3scope says:

    I am planning to promote my website “W3 Scope” via a mix of pay per click advertising, social media marketing compaign, search engine optimization and other promotional methods. This series of article is helping me a lot in learning about PPC advertising. Thank you Nishant.


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