It is useful to understand a few of the basics about how Google Ads work, because the more informed you are the better decisions you will make when choosing your advertising budget. Let’s begin by getting familiar with some key terms—like keywords, placements, Ad Rank, bids, and Quality Score.
Keywords are words or phrases chosen to trigger your ad to appear in the right hand column of search results and on other sites. As an example, if you deliver pizza, you could use "pizza delivery" as a keyword in your AdWords campaign. When someone searches Google for "pizza delivery" or a similar term, your ad could appear on the right, next to Google search results. Your ad could also appear on other websites in the Google Search Network that are related to “pizza delivery.”
Keywords will cause your ads to appear next to Google’s search results and other search sites. Keywords can also trigger your ads to display on a number of related sites across the Internet. Google-owned properties like YouTube and Google's partner sites like the NYTimes.com and Families.com. These placements are part of the Google Display Network.
Google automatically decides where your ads appear by matching your keywords to websites in the Google Display Network. If you would like, you can select the specific GDN placements. You get to set your bids for each as you choose the appropriate sites for your ads to appear.
It is common for a number of advertisers to use the same keyword to prompt their ads and to want their ads to appear on the same Google Properties. Google addresses this conflict of interest by using Ad Rank algorithms to determine which ad(s) will appear, and in what order.
Ad Rank is based on a combination of:
With a keyword-targeted ad on Google Search and its partners, your real bid is based on a combination of your maximum cost-per-click (maximum CPC) bid, which is the maximum amount you're willing to pay for each click on your ad (though the final amount you're charged per click—your actual CPC can be less) and your Ad Quality. Your Ad Quality score is based on your Quality Score. Your Quality Score is a function of your expected click-through rate, your ad relevance, and the quality of your landing page’s user experience.
Every time your Google Ads is eligible to appear on Google search or Google Display Network, your ad goes through the Google Ads auction. The amount you are charged (your actual Cost Per Click) can be less than your maximum CPC bid because the most you will pay is the minimum required to hold your ad position which includes ad formats shown with your ad, such as sitelinks.