How a Typical SEM Ad Auction Works? Factors to Consider

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How a Typical SEM Ad Auction Works?

How the SEM Ad Auction Works? Explained in Detail

As we have learnt in the Keyword Research Tutorial, a typical Ad Copy contains up to three headlines of 30 characters each, up to two descriptions of 90 characters and a display URL that takes the user to the relevant landing page. In this tutorial, we will explain how the Ad auction works and figure out various factors that influence it.

A Typical Example of Ads Copy

Here’s what a typical Google-centric ad copy looks like:

Heading: Sale Ends by Mid-Night
Description 1: Last Chance to Get the Designer-Branded Jacket Line
Description 2: Top-class material, a variety of colors, all sizes, frees shipping
Landing Page URL:

So, the moment you upload the ad and set a bid amount, it should start appearing on SERPs. Right? No! Before the ad gets displayed on SERPS, it needs to go through what is called an Ad Auction, where it competes with other ads for that spot.

Basis behind Search Engine Marketing is indeed, auctions.

A typical SERP contains organic listings in the center and paid advertisements on its right and top. As the ad positions are limited for these ads, advertisers have to compete for them through what is rightfully called an ad auction.

The ads that win the auction appear on the desired slot, usually at the top of the page, followed by the runners up and so on.

How the Ad Auction Works in SEM?

By now, probably, you would be wondering as to how the auction works? Well, as in the auctions in the real world in this auction as well, you place a bid which influences your performance.

However, an auction doesn’t just consider your bid amount. In this auction, the relevance of your ad is equally crucial. So, success of the auction depends on competitive bid as well as strong relevance. You need to pass your ad through both these parameters and if you do so your ad will succeed in the auction.

Now, let’s look at both of these factors and understand as to how they influence your rank on SERPs:

What is a Bid?

For instance, you have just created your first ad to promote your home interiors business. You are willing to pay up to 2 dollars when people click on your ad after searching for home interiors on a SERP. The price, 2 dollars, often quotes your Max Cost-Per-Click (Max CPC). If your competitors have quoted a max CPC of say 1 dollar, you are ahead in the auction as you have gone with a bid of a higher amount.

SEM gives complete flexibility to advertisers to modify their max CPCs anytime, even when the ad is performing live on SERPs. So, you need to keep a close vigil on your bids regularly to ensure that you are getting the performance you want.

And what about Ad Relevance

This is a measure normally rated from 1 to 10. It signifies how closely your ad relates to what the user searches for. Search engines (Google, Bing, etc.) refer to it as a quality score.

For instance what if a person located in Noida searches for Home Interior Services and your ad reads Home Decor Services in NCR, search engines probably consider your ad highly relevant. (Please note that home decor services somewhat match home interior services.) This invariably means that you will get a high quality score.

But what if someone searches for Home Services in Noida? In this case your ad is less relevant because it’s talking about Home Services instead of Home Interior Services. In this case your relevance wouldn’t be as good so you’ll probably have a lower quality score.

Consider this aspect. If two companies bid the same CPC for an ad, the ad with high relevance will rank higher than the one with lower relevance. In the above example if the bids for both the ads “Home Services” and “Home Interior Services” are the same. Then for the keyword Home Interiors, Home Interior Services will rank higher than Home Services.

So, one of the best ways with which you can improve your performance in SEM is by consistently reviewing your campaigns and find more ways to make your ads more relevant. We will understand this aspect of ad campaigns in our upcoming tutorials.

A Typical Day-to-day SEM scenario

Two different businesses compete for same keyword Home Interiors. Company A bids 4 dollars but its ad gets a quality score of 5. Company B bids for 3 dollars and gets a quality score of 9.

Now if we look closely the slots for both the ads on a SERP will depend on Ad Rank, which is the product of Max CPC price and Quality Score.

Ad Rank = Max CPC * Quality Score

If we consider this formula, company A gets an Ad Rank of 20 and company B 27. So, although Company B’s bid price is less than that of Company A, Company B wins the auction, owing to extremely high ad relevance.

How to Gauge an Ad’s Quality Score?

Quality Score of an ad campaign depends on the following factors.

Click through rate: Signifies how often do people click on your ad when it becomes visible? The higher the CTR the better is its quality score.

CTR = Number of clicks an ad receives/Number of times an ad is shown

Landing Page Quality & Relevance:  Signifies how useful and relevant the page is for visitors who have clicked the ad. Ratings are Below Average, Average and Above Average.

Relevance of ad text: Signifies how closely the ad matches the intent of the user.

Historical Ads performance:  Signifies how old the ad campaign is and how well it’s been doing.

We will cover all these factors affecting the quality score in detail in our upcoming tutorials.

SEM Ad Auction: Final Remarks

As you can comprehend from the discourse above, you simply just bid a really high amount for your ads to appear on top of SERPs. If your ads lack relevance, you will get low quality score and with that it may be difficult to compete. And if the ad relevance is too low, search engines will not display your ads at all.

So, the bottom line is, to improve your performance in SEM, stay focused on relevance of all your ad copies. Make sure that your ads closely match the terms the people usually search for. By doing so, you can win better positions for your ads on SERPs.