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2 theories related to actual cpc

[ Edited ]
Visitor ✭ ✭ ✭
# 1
Visitor ✭ ✭ ✭

Hi everybody,

 

I've seen two theories related to the actual cpc floating around the internet, I am hoping somebody on here can clarify which one is the correct one.

Example:

 

            max cpc      quality-score       ad rank   ad position     actual cpc

James   $3                       7                       21         2                       

Kevin     $4.50                  6                      27          1                       ?

 

On the google adwords theory exam you are taught that Kevin being on position 1, he only has to pay $0.01 more than bidder number 2, in this case $3.01

 

Theory 2 involves a little calculation which im sure you all are familiair with: Kevins cost = ad rank below him / his qs + 0.01, in this case: 21:6 = 3.5+0.01 = $3.51

 

As you can see we got 2 different answers, theory 1 simply adding 0.01 to the 2nd bidders max cpc bid, or calculating it via above method.

 

My question: which one is the correct one? Hopefully somebody sees my issue and can help me understand this better.

2 Expert replyverified_user
1 ACCEPTED SOLUTION

Accepted Solutions
Marked as Best Answer.
Solution
Accepted by MosheTLV (Top Contributor)
April 2017

2 theories related to actual cpc

Top Contributor
# 7
Top Contributor

This misunderstanding in the original post is thinking you pay 1 cent more than the bid below you.

 

Google actually says:

 

one cent more than what's required to rank higher than the advertiser immediately below

 

 

View solution in original post

2 theories related to actual cpc

Top Contributor
# 2
Top Contributor

The one explained by Hal Varian;

https://www.youtube.com/watch?v=5ZnWq0XMClc

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
Did you find any helpful responses or answers to your query? If yes, please mark it as the ‘Best Answer’

2 theories related to actual cpc

[ Edited ]
Visitor ✭ ✭ ✭
# 3
Visitor ✭ ✭ ✭

Hi MosheTLV,

 

I did just watch that, thanks.

 

But when is this theory of paying $0.01 above the bidder below you ever coming to play if this isnt even valid?

 

Even the adwords fundamentals exam says different and so does the theory posted by google:

 

If the advertiser immediately below you bids US$2.00, and if that advertiser's ad is the same quality as yours (and has equal-performing extensions and ad formats), you'd typically need to bid a penny more than US$2.00 to rank higher than that advertiser and still maintain your position and ad formats. With AdWords, that's the most you'll pay (about US$2.01), whether your bid is US$3.00, US$5.00, or more.

 

https://support.google.com/partners/answer/6297?hl=en&topic=2795210&ctx=topic&path=2792638)

2 theories related to actual cpc

Top Contributor
# 4
Top Contributor

It's a simple algebra:

Ad_Rank1=AdRank2

Q1Bid1=Q2Bid2

Bid1=Q@Bid2/Q1 =AdRank2/Q1.

To make this equality an inequality,   one penny is added to the result"

Bid1 =AdRank2/Q1 +0.01

Please note that this is a simplified explanation. The actual algorithm takes into account real time ad quality that also includes in the calculation extension performance.

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
Did you find any helpful responses or answers to your query? If yes, please mark it as the ‘Best Answer’

2 theories related to actual cpc

[ Edited ]
Visitor ✭ ✭ ✭
# 5
Visitor ✭ ✭ ✭

Im familiair with:

max cpc x quality score = ad rank

ad rank of bidder below you / your quality score = actual cpc

 

If what you're posting is not one of those above methods, I am even more confused and you will need to elaborate.

 

back to OP, answer B ($3.51) is the correct one?

2 theories related to actual cpc

[ Edited ]
Top Contributor
# 6
Top Contributor

Kevin.

My formula and yours are identical and the same as Hal Varian's, I'm not sure what could be  confusing here:

21/6+0.01 =3.51

Note: in your option #1 Kevin's QS doesn't play a role in reducing the cpc - which is the whole concept of behind QS when Google first introduced it, back in 2006...

 

 

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
Did you find any helpful responses or answers to your query? If yes, please mark it as the ‘Best Answer’
Marked as Best Answer.
Solution
Accepted by MosheTLV (Top Contributor)
April 2017

2 theories related to actual cpc

Top Contributor
# 7
Top Contributor

This misunderstanding in the original post is thinking you pay 1 cent more than the bid below you.

 

Google actually says:

 

one cent more than what's required to rank higher than the advertiser immediately below