Up Close With Google AdWords

Forget the hype about what the new cost-per-click AdWords program means for Google, in terms of competing with Overture. What's in the program for advertisers, and how does the cost per click pricing fit in with the existing cost per impression ads? Let's take a look.

The CPC-based program is officially called "AdWords Select," to distinguish it from the original CPM-based AdWords program. You can sign-up via the AdWords Select site listed below.

You can get started with a $5 activation fee, compared to the $50 deposit that Overture requires. However, unlike with Overture, that $5 won't be credited toward any of your ad clicks that you are charged for.

Minimum Bids A Moving Target

As with Overture, you pay by the click. If your ad appears and no one clicks on it, then you pay nothing. Also as with Overture, there's a $0.05 minimum bid amount for ads. You'll never be able to purchase an ad for less than this amount. That's where the differences end. Unlike Overture, Google may force you to pay a much higher minimum bid for terms.

Google sets higher minimum bid amounts for terms it considers to be popular. It makes sense for Google, because if there are only a few people bidding on a term, setting a higher bid amount helps ensure that the company gets the most return on a particular keyword. However, for the advertiser, it's not so great. If no one's bidding on a term, you still may have to pay a premium for it.

For example, let's say that I want to bid on the word "shoes." I set things up so that Google will only make my ad appear when that exact word is searched for, as described further below. I've also configure it to show up only for those searching in English and from the United Kingdom, also described further below. After saving this keyword for my ad, Google comes back with its "Traffic Estimator" screen to tell me to choose a maximum per click amount and suggests $0.27.

Now, no one is actually bidding on this term at Google and targeting UK users, so I might think I can ignore the suggested click amount and drop to the $0.05 minimum. If I do this, Google will come back and tell me that the minimum CPC is $0.27. So, even though absolutely no ads are running for this term, the "popularity" is enough that Google wants me to pay more than $0.05 for it.

Let's try something else. How about the exact term "viagra" aimed at those searching in the US in English? The suggested cost is $3.72 per click. Ouch. Can I go lower than that? I enter $0.05, which causes the Traffic Estimator to come back and say that the minimum amount it will accept is $0.48. However, entering that amount shows me that I won't appear at all. There are plenty of people willing to pay far more than this. To appear, I need to up the maximum CPC that I'm willing to pay.

Where O Where Do You Appear? The ClickValue Rate

At Overture, those who pay the most get the highest rankings. That's easy, simple to understand. At Google, AdWords are ranked by what I'm going to call the "ClickValue" rate, since Google doesn't have its own term for this. Why ClickValue? Because the ranking factor is a combination of both the clicks an ad receives and the value in CPC terms that it represents to Google.

If all things were equal, ads at Google would be listed in order of the cost-per-click they are paying. Those who pay the most would come first, as with Overture. However, Google multiplies an ad's CPC by its clickthrough rate, to arrive at a ClickValue rate. Thus, even if two ads have the same CPC, the ad with the higher ClickValue rate gets listed first.

Imagine this scenario. Three people are all bidding on the term "shoes." SuperShoes agrees to pay 5 cents per click, FancyShoes 6 cents per click and ValueShoes, 7 cents. The 5 cent person has a clickthrough rate of 3 percent, the 6 cent person a clickthrough rate of 2 percent and the 7 cent person also a rate of 2 percent. Here's how Google would determine the rankings:

SuperShoes: 5 cents X 3 percent = ClickValue Rate of 15
ValueShoes: 7 cents X 2 percent = ClickValue Rate of 14
FancyShoes: 6 cents X 2 percent = ClickValue Rate of 12

As you can see in the situation above, the advertiser agreeing to pay the least still manages to get the top placement, because their ad attracts the most clicks.

Isn't the top ad naturally going to receive more clicks, because it is at the top? Yes, but Google also makes adjustments for this, so that ads get a benefit only if they draw clickthroughs beyond what would have been expected on average for a particular position.

"If the average clickthrough rate is 1 percent for the first position, and 0.5 percent for the fifth position, then we know that an ad that is shown in the first position with a clickthrough rate of 2 percent is equivalent (for ranking and thresholding purposes) to an ad in the fifth position with a clickthrough rate of 1 percent," said Google spokesperson David Krane.

And while Google is making adjustments, it also turns out that the differences in drawing clicks has much less to do with your position than it does with your ads. Google says that it finds users tend to review all the ads, then select the ones that seem most appropriate, with positioning more a secondary factor.

"We don't cite actual clickthrough rates, but we don't see a big decline in the clickthrough rate going from above-the-fold to below-the-fold. While the second position has a lower clickthrough rate than the first position, and the sixth position has a lower clickthrough rate than the fifth position, the differences in clickthrough rate as you go farther down the page are small," Krane said.

Death By Lack Of Clicks

So ads with good clickthroughs are rewarded at Google, and those with bad ones get penalized. Really bad ads -- those that get below 0.5 percent in clicks after appearing 1,000 times, face the ultimate penalty. They are prevented from appearing at all. Google calls it putting an ad on "pause," and it's the advertising equivalent of hockey's penalty box. But why do this, especially when removing ads reduces revenue? To protect the long-term value of the ad area, Google says.

"If there are categories of ads where the clickthrough rates are very low, it means that users are spending time looking for information and not getting what they need. As a result, they will spend less time paying attention to information provided to them through our ads. So it's very important to us that all ads that are shown be useful to our users, because this will ensure the highest success for our advertisers in the long-term," Krane said.

Advertisers can unpause an ad, but they are strongly encouraged to work on their wording or select new terms for the ad, to prevent it from getting paused again.

Google also looks at how an account is doing overall, for all of its keywords. If the entire account on a whole isn't hitting the 0.5 percent clickthrough rate, then many poor performing ads within the account may be restricted, and Google will warn to make changes. Get warned three times, and you are out -- at least until you restart your account by paying $5 reactivation fee.

"If the average clickthrough rate for the whole account goes below a 0.5 percent clickthrough rate, normalized by position, after being shown more than 1,000 times, our automated performance monitor will continue delivering ads only for those keywords that are earning more than a 0.5 percent clickthrough rate. Keywords that have less than a 0.5 percent clickthrough rate will only be shown very rarely, and once they've been shown 1,000 times, will be disabled, like any other keyword with more than 1,000 impression but less than 0.5% clickthrough rate," Krane explained.

If your account as a whole falls below the threshold described above, you'll get an email telling you to consider reworking your ad wordings and to reexamine how you are targeting ads. When ready, you can unpause your entire account.

"At any point, an advertiser whose account has gone below the minimum threshold can restore full delivery to all of their keywords by clicking on a button in their interface that says 'Restore Full Delivery.' Most advertisers in AdWords Select whose accounts have gone below the threshold respond successfully and are able to significantly improve their clickthrough rates," Krane said.

Goodbye To Bid Gaps? Perhaps

At Overture, "bid gaps" can open up, where someone lowers their bid without you realizing it, costing you money. For example, imagine you were bidding on a term to be number one at 70 cents per click, above the second place person at 69 cents. Things change below the second place person, allowing them to drop down to 60 cents. Now you are paying 9 cents more than you need to, until you close the "gap."

Bid gaps are such a problem at Overture that special tools have emerged over the past year, to help advertisers eliminate them. In turn, those tools have burdened Overture so much that it recently established a program so that only those agreeing to make bid changes no more than six times per day could qualify to be "authorized" (though advertisers themselves can make manual changes as often as they like). In the future, unauthorized tools may be blocked by Overture.

The Google AdWords "Discounter" tool is touted as a solution to this problem. It automatically watches to ensure that you never pay more than 1 cent more than the ad below yours. However, if the tool works in the way I understand it, bid gaps may still happen because ads are sorted by ClickValue rate, not by CPC.

I didn't have a chance to go through my questions over the discounter tool in more depth with Google before I had to file this article, so I'll revisit this particular aspect of AdWords Select in the future and confirm if the discounter is indeed a great improvement (and one that Overture ought to offer) or whether it turns out that the discounter isn't as good as it sounds. One thing that makes it difficult to tell is that Google, unlike Overture, doesn't show the CPC that ads are paying.

Let me give you a scenario that explains why I think bid gaps may still happen. Let's say we have three people bidding on a particular term and ranked in ClickValue order like this:

SuperShoes: 50 cents X 2 percent = 100 ClickValue Rate
ValueShoes: 49 cents X 2 percent = 98 ClickValue Rate
FancyShoes: 39 cents X 2.5 percent = 97.5 ClickValue Rate

Now, why wouldn't ValueShoes automatically be dropped to 40 cents, so that there would be only one cent difference between it and FancyShoes? The reason, if I understand correctly, is because if ValueShoes paid any less, its ClickValue rate would drop below that of FancyShoes. The discounter tool is set to ensure you never pay a penny more than you need to, but ValueShoes does need to pay those extra pennies, to maintain its position.

In contrast, if this were at Overture, there would be no ClickValue rate to complicate things. ValueShoes could drop to 40 cents safely, and maintain its ranking above FancyShoes.

Also, remember earlier in this article, when I noted that I found Google suggesting to me that to show up for "viagra," I needed to pay $3.72. The minimum bid allowed me to pay only $0.48, but that wasn't high enough to get on the page.

Further testing found that $0.75 would get me on the page with an estimated average position of sixth. But if the top ranking ad was near $3.72, then there are clearly large gaps between ads, supporting my understanding of how the ClickValue rate may cause this.

Beyond questions about how much discount the discounter really gives, it may also be that Google will bid you "up" to your maximum limit, if it can do it. Again, this is another issue that I need to reconfirm, but let me draw a scenario to explain what I understand may happen.

In the situation below, there are five people listed for a particular term, where the minimum bid allowed was 38 cents:

SuperShoes: 50 cents X 2 percent = 100 ClickValue Rate
ValueShoes: 49 cents X 2 percent = 98 ClickValue Rate
FancyShoes: 39 cents X 2.5 percent = 97.5 ClickValue Rate
NewcomerShoes: 38 cents x .75 percent = 28.5 ClickValue Rate

In this case, NewcomerShoes pays the minimum bid, which is enough to get listed. However, its poor clickthrough means the ads is relegated to fourth place.

Now NewcomerShoes wants to be number one. To do this, it needs to pay $1.35, in order to get a ClickValue rate above SuperShoes:

NewcomerShoes: $1.35 x .75 percent = 101 ClickValue Rate
SuperShoes: 50 cents X 2 percent = 100 ClickValue Rate
ValueShoes: 49 cents X 2 percent = 98 ClickValue Rate
FancyShoes: 39 cents X 2.5 percent = 97.5 ClickValue Rate

SuperShoes would also like to be number one. Will this happen? Only if the maximum CPC that SuperShoes originally set is above 50 cents. If they set a limit of 75 cents, for instance, then Google would automatically move them into the top position, if it can do this given the SuperShoes ClickValue rate.

Likewise, Google will try to move anyone who is paying below the maximum CPC rate initially set into the top position, until an order is established when everyone hits their upper limits. Given this, Google in some ways will actually cause an automatic bidding war between advertisers, until everyone is paying the most that they've agreed to pay.

Once again, I'll reconfirm both the questions about how the discounter works and whether keywords can be bidded up to their maximums, as I've outlined as a possibility, in a coming newsletter.


After you've selected a set of terms, the Traffic Estimator tool will try to estimate how much you will pay on a daily basis. However, you can also set a maximum daily budget. This will prevent you from spending more money than you want in a particular day. If you hit your limit, like a bartender with someone who's had too much, Google will cut you off. The next day, your ads will run again.

Ad Content Guidelines

As with Overture, it's not anything goes in terms of ad content. Google has terms and conditions that must be followed, and a link the page that outlines them is below.

Unlike Overture, Google also lets ads go live instantly, then reviews them later in the day to make sure they are indeed relevant. In contrast, Overture takes 3 to 5 days to do a review. Google says can review ads quickly by having an efficient system.

Of course, allowing ads to go live immediately means that an ad like the one below could get through:

CLICK HERE to get 1 month free with MSN Internet Access instead!

This ad ran shortly after the CPC program went live to the public. It was apparently placed by an MSN affiliate and was quickly spotted by the eager eyes posting at Webmaster World, who found it coming up for a search on AOL. The ad no longer appears.

Targeting Ads By Country Or Language

Google has a strong audience from all over the world and operates a number of country-specific web sites. This means it can offer the ability to target users in particular countries, or those who are searching in particular languages. When creating a campaign, you'll be given an option to target your ads in these ways, if you desire.

Google determines country location based on someone's IP address. For instance, as I work out of the UK, I only get shown ads targeted to UK users, even when I go to Google.com. The only way to overcome this is for me to use a special IP cloaking service, which few people would bother with. The system's not perfect, but it's pretty good. As for language, Google users can set their preferred language, and for those who do, they get language-targeted ads.

A feature Google desperately needs to add is a way for those targeting a particular country to see what ads Google is displaying, if they are not in that country. Perhaps this is something Google can make available to advertisers who are logged into the AdWords service.

What About Old AdWords

Like paying CPM rates for your AdWords listings? You can still do it. However, your ads will show below ads from the new AdWords Select program. In addition, if there eight AdWords Select ads, then the CPM-based AdWords Classic ads won't appear at all.

"In the future, we will add functionality so that a new set of ads will be shown on successive pages. As a result, a new set of ads will appear for users that don't get the information they want from the first page of results and ads," Krane said.

The writing's on the wall, here. I think eventually you'll see the CPM model for AdWords get killed off. Google has an alternative CPM product, the two "text banners" that are now called Premium Sponsorships, which appear directly above the usual editorial results. I suspect you'll see these become the product aimed at those who want CPM pricing or don't want to hassle with a self-serve ad system. Of course, you have to pay a lot for these -- a minimum spend of $7,500 per quarter or more.

For its part, Google says that if there's demand for CPM-based AdWords, it will accommodate that.

"It's likely that most of our AdWords CPM are going to switch to AdWords Select because of the pricing flexibility. However, we will continue to offer AdWords CPM as long as we have advertisers who prefer to purchase in that way," Krane said.

Ironically, it's the CPM-based AdWords out there now that are creating the high minimum bids for some terms. Google's system takes into account the average cost per click that the CPM advertisers are paying, then uses that to help create the minimums that AdWords Select people have to pay. The idea here is that if AdWords Select people get to come first, that's because they are paying the most.

Of course, the idea is also that Google needed a way to phase in the new CPC program without devaluing the tens of thousands of advertisers it says are already in the existing AdWords program. In addition, if the CPC program grows as expected, then it can more safely drop support for the CPM program -- while also having built a history of what minimum bids it can command for a wide variety of terms.

You can have both an old and new AdWords accounts if you want, but if you do, you could also have the same ad run twice. The FAQ page below explains how to prevent this.

Other Things

Like Overture, Google has a new search term research tool to help CPC customers target their ads When you click "suggestions," AdWords provides a list of phrases that will display ads for the keyword you've selected. Use this information to help you identify specific phrases that best describe your product or service and to eliminate unrelated terms.

You should also be aware that unlike Overture, Google lets you target ads to be beyond exact terms. In other words, you could choose a "broad" link to the word "shoes," where you ad would show up in any search containing that term. You can narrow things down by targeting only exact phrases or exact words, as well as "negative" matches, where your ad won't show up is a particular word is mentioned. Make sure you target correctly. It's easy to go broad by mistake, especially if you are used to the Overture system.

By default, your ad will run on some sites beyond Google, currently Earthlink in the US and Sympatico Lycos in Canada. If you don't want this "syndication" distribution, you'll need to opt out from it. The FAQ page below explains how.

In Conclusion: AdWords Select Is Confusing

One goal Google had in rolling out AdWords Select was to make things easier for advertisers. Advertisers wanted CPC pricing, so they could compare their costs to other paid listing products, such as Overture's. Google delivered on CPC pricing, but its implementation leaves a lot to be desired.

Overture is easy -- you pay by the click, the minimum is always the same, and those who pay the most come first. In contrast, Google makes it hard to predict where you'll appear and know how much you are paying.

The motivation behind Google's ClickValue ranking method is noble. Google is trying to create the most "relevant" ads for a particular term. The thought is that those who write the best ads will be rewarded with clicks and thus do better in the system. Money doesn't rule. Of course, Google is also looking out for itself, to ensure that users consider both the ad listings along with editorial listings, in choosing what to click on.

Personally, I think Google should drop the ClickValue idea. These are ads. As long as they are not misleading (and that should be policed), what's wrong with letting the person who pays the most come first? That's essentially what happens with Yellow Pages listings, where the people who pay the most get the biggest ads. In fact, it's hard to think of an advertising medium where money doesn't rule, when it comes to positioning.

In a somewhat similar situation, Overture recently changed its style rules so that exclamation points could no longer be used in ads. Why not?, I asked. The answer was that, in part, Overture thought that having some ads using exclamation marks didn't put all the ads on a "level playing field."

Level playing field? These are ads! These are ads at Overture, though it sometimes doesn't like to call them that, and these are ads at Google. There is no level playing field. There is nothing "fair" about them. People are only showing up in these listings because they are spending money.

Having a minimum clickthrough requirement makes sense, given that ads with no or extremely low clickthrough don't earn Google money. But that's enough.

The last paid listings programs that had complications like those in Google AdWords were from Direct Hit and MSN Search, back in 2000. They died in part because they were so hard to figure out. I think Google's program is unlikely to die from its complications, but it would probably thrive more without them.

AdWords Select

Google Adwords: FAQ

Google AdWords Keyword Suggestions

Like Overture's tool, this shows top queries related to the terms you input, though it doesn't provide guidance as to frequency.

Paid Links At MSN Search And Direct Hit
The Search Engine Update April 24, 2000

This past article documents how difficult the MSN Search and Direct Hit paid listings programs were to use.


Overture Names "Authorized" Bid Management Providers
The Search Engine Update, Jan. 22, 2002

Past article about the Overture's authorization program for bid management tools.

Overture-approved PPC Bid Management Tools at a Glance
Pay-Per-Master, Feb. 22, 2002

Summarizes features of the Overture-approved bid management tools.

Google's PPC Program
Webmaster World, Feb. 20, 2002

Reaction to the AdWords Select program, from frequenters of the Webmaster World forums.

MSN using Google to Attack AOL?
Webmaster World, Feb. 20, 2002

The sighting of that anti-AOL ad on Google AdWords.

The Cloak

Don't be put off by the name. This has nothing to do with search engine cloaking. Instead, it cloaks your browser's IP address. That means you can use this if you want to see Google ads from a country you aren't in. Just go to the country-specific web site that Google operates via The Cloak.