How AdWords and the Bidding System Works

March 1, 2024

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For the leader in pay-per-click advertising services, there sure is a lot of confusion in the way Google AdWords works.

It’s one of those things where you have a general idea of what goes on, but when you’re asked to explain it to someone, you suddenly find yourself stuttering something about quality score and ad rank and how they need to be high to get your ads displayed in the search results.

However, if you’re planning on running an AdWords campaign, you need to take a look behind the curtain and understand a few basic principles about how it works. Let’s take a closer look at the AdWords bidding process, step by step.

Google ads keyword bidding


How It Works

When you get right down to it, Google AdWords operates on a relatively simple process. First, you need a keyword. When someone is searching for that keyword, the search engine tries to match the query with relevant ads.

But what happens when more advertisers use the same keyword? Well, that’s where the AdWords auction process comes into play.

Ad Ranking

If you’ve ever searched for something on Google, you might have noticed that the SERP will show several ads. There’s a reason why certain ads appear before others, and it’s called ad ranking.

Here’s how it works: the highest ranking ad gets the top ad position, but getting this honour isn’t just dependent on how much you bid for a keyword. Google is also looking at two other things to establish ad ranking: the maximum bid, and ad quality score.

Ad Auction

Every time your AdWords ad is set to appear for a search query (meaning it meets the required criteria), it automatically enters an ad auction which will determine if the ad will appear in the SERP and on what position.

Let’s take a practical example of an ad auction. Tom is looking for a pet store in New Jersey, so he’ll go on Google and look for one. He’ll most likely type something like “pet store Jersey.”

The AdWords system will look through its ad directory to find the ads whose keywords match Tom’s search. Ads for pet stores not located in New Jersey will be overlooked because they are not relevant to Tom. Ads that are not approved because they don’t meet the AdWords guidelines are also discounted.

AdWords compiles a list of ten ads that might be relevant to Tom’s query, and it needs to figure out in what order to present them. So it will look at the Ad Rank, and use it as sorting criteria. The highest rank gets the top spot, while the lowest might even be bumped to the second or third result page.

Quality ScoreQuality Score of PPC

The quality score is an integral part of the bidding system, so it pays to understand what it is. Every ad gets a quality score between 1 and 10. The number represents Google’s assessment of the quality and relevance of your chosen keywords, as well as the ads themselves.

A high-quality score shows that your keywords, landing page, or ad text are useful to users, and Google will then charge you less (meaning a lower cost-per-click than other advertisers, while still keeping a top ad ranking.)

Keyword Bidding

If you want your ad to appear at the top of the result page, then you have to select the keywords relevant to your audience and then bid on them. In other words, you have to set a certain amount you’re willing to pay each time a user clicks on your ad.

However, the problem here is that popular keywords have a rather high CPC bid because you are competing against other advertisers in a game of “who’s willing to pay more for this keyword.”

Another thing worth mentioning here is the ad match type, which is a way to help AdWords make a connection between your keyword and user queries. For instance, a Broad Match can mean your ad will show in a query even if your keyword isn’t 100% what the person typed.

That accounts for misspellings, keyword variation, and synonyms, so your ads have a higher shot at getting on the result page. However, it also might cost you more in the end. So, if you can’t afford it, then it would be a good idea to choose a phrase match or exact match to limit your reach.


AdWords and the entire bidding and auction system can seem overwhelming from the outside, but once you get these essential features, it’ll be a lot easier to navigate and create high-performing ads.

Or, you can contact us at Australian Internet Advertising today and let our extensive AdWords management expertise handle your AdWords needs and create a profitable bid strategy.

Billy P.

About The Author

William Polson founded Australian Internet Advertising in 2013 and has over 12 years of experience immersed in Digital Marketing.

With an in-depth level of digital marketing knowledge, William has been sort after by and worked for, many large national brands including Subaru, Blooms The Chemist, and Nova 96.9.

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