According to Google, it has been observed that in many occasions, advertisers know more about advanced features of AdWords than about its basic functionality. AdWords offers pay-per-click (PPC) advertising, cost-per-thousand (CPM) advertising, and site-targeted advertising for text, banner, and rich-media ads. The AdWords team has felt that it was necessary to take some time to get back to basics and talk about how the AdWords auction actually works.
In the video below, Google Business Chief Economist, Hal Varian, explains the basics of AdWords Ad Auction and how your maximum cost-per-click (CPC) bid and Quality Score determine how much you actually pay for an ad click on Google’s search results pages.
When people think of an auction, they often think of a prize being sold for the highest bid. But the AdWords auction works a little differently, where the winner only pays the minimum amount necessary to maintain their position on the page. That means you’ll only pay the minimum necessary to beat the person below you. In fact, our quality-based pricing system ensures that you’ll often pay less than your maximum bid.
The video is probably the simplest and best explanation of Quality Score that you’ll ever find. A must watch for every AdWords advertiser.