In the world of paid search marketing, a bid is the maximum amount of money an advertiser is willing to pay for each click on an advertisement. However, advertisers do not place bids on ads or ad space; they place bids on keywords, and whether their ads show when people search things related to those keywords depends on their performance in an auction.

Wait, what auction?

You know, the auction! The millions of business owners who use Google Ads (formerly known as Google AdWords) pile into a middle school gym once a month and place their bids on keywords. Rob Riggle is the auctioneer. It’s a good time.

Yeah, no, that’s not true. In reality, the auction is automated, and it takes place every time someone searches something on Google. If the keyword contained in the search query has been bid on by more than one advertiser, an auction occurs. By the end of the auction, Google has determined which ads will show in the SERP, where those ads will show in the SERP, and how much each advertiser must pay per click. It’s not quite Rob Riggle saying a bunch of keywords in really fast succession, but it’s still pretty neat.

Let’s back up for a hot second. Remember, in order to be considered for entry into the auction, an advertiser must declare the maximum amount of money it is willing to pay for a particular keyword. Just because you sell auto insurance, doesn’t mean you’re automatically eligible to show ads when people search “car insurance quote.”

Your maximum bid is a major determinant of your SERP ranking. The other big factor is known as your Quality Score, and it’s made up of a few different things. First things first: your click-through rate (CTR). If you have a high CTR, you must be helpful and relevant, thus improving your score in the eyes of Google. The quality of your landing pages is also an important piece of Quality Score. On top of that, it’s a matter of using the keyword in your ad copy and URL to show your relevance to the search query.

To determine which advertiser goes where, Google multiplies the bids by the Quality Scores. The advertiser with the highest value gets the #1 SERP ranking.

The final important piece of the auction process is the determination of each advertiser’s CPC. Fortunately, it’s simple. Divide the ad rank (the product of maximum bid and Quality Score) of the advertiser below you by your Quality Score. Then, add one cent, and you’re done! Evidently, the best way to reduce your CPC is to boost your Quality Score. Focus on those factors we mentioned and you’re golden.

Quick Bidding Tips

We have some advice for those of you who are unsure of where to start. Google Ads has a feature that gives you an estimate of how much you need to bid to rank on the first page for a certain keyword. Aim a little higher than that to give yourself a chance at the middle of the page.

A common concern with advertisers is managing to remain competitive with their bids without overshooting and burning through their budgets. To navigate this issue, use the online tools at your disposal to see what your industry competitors are bidding on your keywords and go from there.

For the mathematically-minded advertisers, there is an easy way to calculate your CPC using only your conversion rate and your target cost per conversion (CPA). Simply multiply your current conversion rate (conversions/visitors) by your goal CPA (costs/revenues), and that figure tells you exactly how much you should be willing to bid!

For more bidding tips and tricks, head over to the WordStream blog.