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Actual CPC calculation

Visitor ✭ ✭ ✭
# 1
Visitor ✭ ✭ ✭

Hi, 

 

As I understand it actual CPC calculation is: P1 = (B2*Q2)/Q1 + $0.01 

 

I can do multiple examples and easily calculate the actual CPC thats fine, but I don't understand how this works.

 

It may seem like a silly question, but how does dividing the ad rank of position two by the QS of position one and adding $0.01 give you the amount which is just enough to maintain position one?

 

If someone could break this down very simply it would be much appreciated!

 

Thanks  

2 Expert replyverified_user

Actual CPC calculation

Badged Google Partner
# 2
Badged Google Partner

Ad rank = Bid X QS. I don't know where this equation came from, but I'm pretty sure it wasn't Google.

 

It may be more accurate to think about ad position and actual CPC from a bottom-up, than a top-down perspective. If all the factors of ad rank are equal amongst all of the eligible impressions, then the lowest bid sets the floor of the auction. If there are only three available positions, and the lowest bid doesn't earn a high enough adrank to show, then the lowest position goes to the next highest bidder... So on and so forth until the lowest possible position has been set. Once the floor has been established, then the next highest positions/bids are set. $0.01 for position two, $0.02 for position one.

 

Of course, all those factors that go into the QS side of the adrank equation are never equal, and change per every possible impression instance. You can theorize about the necessary bid to earn top position down to the last cent, but if you get too cute about it, you will likely end up doing yourself more harm than good. Don't step over dollars to save pennies. Smiley Happy

Tom

Actual CPC calculation

Rising Star
# 3
Rising Star

@Braden V

 

That's not really correct.  This is because of format impact being a part of Ad Rank.  You are also not going to know your competitors bid and QS.  Even if you did, it's still not something you could calculate with format impact factored into Ad Rank.  

They updated the Hal Varian video a couple of months ago and format impact is touched on.  You can watch it here: https://www.youtube.com/watch?v=5ZnWq0XMClc

Actual CPC calculation

Visitor ✭ ✭ ✭
# 4
Visitor ✭ ✭ ✭

Thanks. Yes this is from Google's Chief Economist, he explains here from 5.55

https://www.youtube.com/watch?v=qwuUe5kq_O8

 

I understand that Position 2 Ad Rank / Position 1 QS = Positions 1's Actual CPC.

I just don't understand how the formula actually results in the amount that is just enough to beat the position below? - if that makes sense.

 

Im not doing it for optimization, rather for  a research paper :/

 

 

Actual CPC calculation

Visitor ✭ ✭ ✭
# 5
Visitor ✭ ✭ ✭

That updated video was useful, thanks! 

 

So previously Ad Rank was calculated as Max CPC x QS, now there is another variable - format. I learned something new today Smiley Happy

Does Google provide any insights on how format is calculated to come up with the ad rank?  

Actual CPC calculation

Badged Google Partner
# 6
Badged Google Partner

 

Well that's why this equation doesn't make sense - It's not one equation. Smiley Happy You have to solve multiple equations to determine your constants before you can "plug and chug" to come up with the discount that advertiser #1 gets for having a higher quality score in this example. 

 

On the other hand, the video @David K cited is completely counter to Google's mantra over the course of years that you only have to pay $.01 more than the next lowest ranked ad. In that example, even with the highest adrank, you still only get a "discount" from your max cpc bid based on your QS. NOT an actual cpc of $.01 more than the actual cpc of the next lowest ranked ad...

 

So, is that what has changed with Google over the last seven years? Does the equation you cited, and all of Google's marketing materials no longer apply? Maybe that's why the equation isn't making any sense... It's not $.01 more than P2 - It's whatever you are willing to pay given your QS and ad format variables as it applies to ad rank. Even with the highest adrank, and the next lowest max bid of only $2.00, Hal says the lowest actual cpc #1 would have to pay is maybe $3.38... Either Hal got the math wrong, neglected some details, or Google's been lying to us all for years.

 

This has become a very interesting thread. Smiley Happy

 

 

Tom

Re: Actual CPC calculation

Top Contributor
# 7
Top Contributor

Hal's video is a simplified version of  "two advertisers auction" to illustrate the principle.

Actually, Google was the first to introduce the Qaulity based click bidding back (to my recollection in 2006 about 4 years after AdWords was introduced.)

During the years the algorithm eventually improved and now is a multi-variable algorithm, and the auction system has some  additional component incorporated into it (e.g. Extensions) But the principle remains the same: 
QS (advertise1) *Bid (adveriser1) =QS (advertiser 2) *bid (advertiser 2)
Hence;

Bid 2 = AdRank1 / QS2

To make this mathematical equation an inequality, $0.01 is added so one advertiser can be ranked above the other.

Moshe, AdWords Top Contributor , Twitter | Linkedin | Community Profile | Ad-Globe
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Actual CPC calculation

Badged Google Partner
# 8
Badged Google Partner

I was absolutely, completely and totally wrong!

 

One of these days I'm going to actually learn the difference between right and wrong. Until then - Thank God @MosheTLV is around to sort all this out. Smiley Happy

Tom