About the Display Network ad auction
AdWords uses an ad auction to determine which ads to show, the order those ads will appear, and how much those ads will cost. The Display Network ad auction shares many similarities with the AdWords auction. Your ads are ranked among other advertisers' ads based on Ad Rank, which is based on your Max CPC bid and Quality Score. This means that, if your Quality Score is sufficiently better than the score of the advertiser immediately below you, you could rank higher than that advertiser, even if this person's bid is higher than yours.
Just like in the AdWords auction, your Max CPC bid isn't necessarily how much you'll pay per click. The price you pay -- Actual CPC -- depends on the outcome of the auction, and it’s often less than your Max CPC bid. You pay what's required to rank higher than the ad position immediately below yours or to clear the auction floor, if any.
This is how the Display Network ad auction differs from the AdWords auction:
- You'll pay what's required to rank higher than the next best ad position only for incremental clicks you get from being in the current position.
- You'll pay the price you would have for the next best ad position for the rest of the clicks.
- You may pay an additional service fee for ads that use audience targeting. In such cases, your maximum bid is reduced before the auction and the fee is added to the closing auction price.
About incremental clicks
Different ad positions have different visibility, and therefore get different number of clicks. For example, in an ad unit with two ad positions, your ad might get 10 clicks by being in the most visible top position, but only eight clicks if it shows in the less visible second position. Here, the two additional clicks are considered the incremental clicks for being in the top position, as opposed to the second position.
In this example, the difference in visibility of the two positions seems to be relatively small -- they generate a similar number of clicks. The auction for ads on the Google Display Network is designed to make sure that advertisers are paying a fair price for incremental clicks.
For the advertiser that wins the top position, it will typically pay about one penny more than what's required to rank higher than the advertiser immediately below for only two incremental clicks. For the remaining eight clicks, it will pay a lower price -- the amount it would have paid if it had ranked in the second position.
In a nutshell
The Actual CPC that an advertiser pays is based on the weighted average of the bids and Quality Scores of the advertisers ranking below (and includes any applicable service fees). The weights are based on the incremental performance of the position.
Here are some examples that explain how this works. To simplify them, we'll assume the ads have identical Quality Scores.
Example: Ad auction for an ad unit that shows one ad
|Advertiser||Max CPC Bid||Quality Score||Ad Shown?|
In this example, there are three advertisers with the same Quality Score competing for an ad unit that can show only one ad. Alice wins the auction because she is bidding the highest, based on a combination of Max CPC bid and Quality Score.
The amount that’s required for Alice to rank above the next best ad -- Bob's -- is $3.01. Because this is an ad unit that shows only one ad, all of the clicks Alice receives are considered incremental to what she'd would have received in a lower position. This is equivalent to not being shown because since there is no lower position. Alice then pays an Actual CPC of $3.01 per click.
Example: Ad auction for an ad unit that shows two ads
|Advertiser||Max CPC Bid||Quality Score||Ad Shown?||Relative CTR of Position|
Now, say that the ad unit shows more than one ad. We use "Relative CTR of Position" to show that not all ad positions are equally visible, and that higher ad positions can get you more clicks than lower ad positions. ("CTR" refers to your ad's clickthrough rate.)
In this particular example, the top position is much more visible than the second position: the ad will get three times more clicks in the top position than it would have gotten in the second position.
All of Bob’s clicks are considered incremental compared to what he'd have received in a lower position, not having his ad show. Therefore, Bob pays an Actual CPC of $1.01 per click.
Alice’s Actual CPC in this example depends on both the incremental clicks she gets from being in the top position and Bob’s Actual CPC. According to the Relative CTR of Position, Alice is getting three times as many clicks by being in the top position compared to being in the second position. So, two-thirds of her clicks are considered incremental, while the remaining one-third are clicks she'd have gotten if she had occupied the second position.
Let's say Alice gets three clicks total, for the first click she'd pay the same price Bob pays. For her next two clicks, she'd pay $3.01, which is the price required to rank above Bob's ad. Her costs would look like this:
|Total: 3||Actual CPC: $2.34||Total: $7.03|
Her actual CPC would be $2.34, which equals the total she spent divided by the clicks she got.
Going beyond the simplified examples above, Google will sometimes run an auction and determine that showing one ad is better than showing multiple ads in an ad unit large enough to accommodate multiple ads. These decisions are made in the auction, and the Actual CPCs of ads shown are calculated based on the same principles and mechanism as the simplified examples above.