Digital Marketing Measurement

Google AdWords and contextual targeting

Talking about display advertising, I dedicated a blog post to display ads and rich media ads, only mentioning text ads briefly.

I would like to talk about text ads in more detail now, by giving an overview of how contextual advertising works in Google AdWords, in relation to Google Search.

Let’s start from what may sound like stating the obvious by now. John Battelle has defined Search as a database of intentions and a query as “a declaration of a very particular intent”: to find something you want. This database of intentions may have become “larger” and more articulated as Battelle states, but this point about Search stands true: people generally use search engines to look up something they want, something they need.

Contextual advertising stems from this acknowledgement. The idea is to advertise your product to whom is looking for it and when they are looking for it: in context.

If I sell digital cameras, my ad may be of interest to users who are searching for something related to digital cameras.

Sample of a search result page

Sample of a search result page

AdWords allows advertisers to create ads and target them to a list of relevant keywords. When a user performs a query related to keywords that advertisers have targeted, Google will return contextual ads, along with the organic (or natural) search results (pages from the Google index relevant to the query).

In the picture above you can see how contextual Google ads – when available – are placed on the right-hand sidebar and on top of the organic search results.

Obviously, there is only a limited number of ads that Google can show on a search result page and the more competitive the query is (the more targeted it is), the harder it is to get a slot for your ad.

How does Google decide which ads appear on a given search result page?

With a system called Google Ad Auction, which Hal Varian, Chief Economist at Google, explains in this video.

When a user performs a query in Google’s search engine, an algorithm checks if there is ad inventory for that query (if advertisers have chosen to target their ads to keywords related to that query) and, if there is, it performs a virtual auction to assess which ads to show in the available slots.

Google AdWords is based on a CPC (Cost Per Click) pricing model (advertisers are charged only if a user clicks on their ad, whereas they are not charged if the ad appears on the page but is not clicked on).

When an advertiser creates an ad and chooses a list of related keywords as targeting, he/she will have to decide on a Maximum CPC (Max CPC) for each keyword included. The Max CPC is the maximum amount the advertiser is willing to pay for a click on the ad.

For example, I could decide to target my ad to digital cameras and be willing to pay € 0.50 as maximum amount for a click on the ad in relation to that keyword. I could also target the same ad to other keywords and set different Max CPCs for them, for example I could be willing to pay € 0.80 as max CPC for cheap digital cameras.

Now let’s go back to our limited slots available on a search result page: what determines which ads are chosen for the available slots and in what order they are placed is an index called Ad Rank.

Ad Rank is calculated with the following formula:

Ad Rank = Max CPC x Quality Score

Quality score is a metric that Google calculates for every ad entering an auction to assess how relevant and useful the ad is to users in relation to that specific query.

Quality score is determined based on three main factors:

–       CTR (Click Through Rate)

–       Relevancy

–       Landing Page quality

CTR is by far the most important component. It’s an ad performance metric and is given by the number of clicks on an ad divided by the number of times that ad is shown (number of impressions), expressed as a percentage. As soon as an ad starts registering impressions, its CTR will vary depending on how many times users click on it.

Relevancy is the second-largest component of the Quality score and it depends on how much the language of the ad text matches the keywords contained in the query the user has performed.

The third component of the Quality score is the Landing Page Quality: the landing page – the page users get to by clicking through the ad – needs to be relevant and consistent with the ad text, user-friendly, fast to load etc. In short, it needs to provide a good user experience.

The Max CPC is, as said, the maximum amount an advertiser is willing to pay for a click on his/her ad. However, most of the time an advertiser will pay less than that in the case of a click. The system is designed in such as way that you only pay enough to beat the bid of the advertiser below you, as explained in Varian’s video. The actual amount an advertiser is charged for a click is called (surprisingly!) Actual CPC.

A detailed explanation of the CPC bidding system is available on the Google AdWords help center.

For advertisers it is important to monitor the performance of their ad campaign over time and to fine-tune the different factors in place accordingly (Max CPC, keywords, ad creative, landing page quality etc).

There’s a lot to say about AdWords, so I will come back to it to talk about how an AdWords campaign is structured.


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2 thoughts on “Google AdWords and contextual targeting

  1. Thank you! That’s very nice of you! I’m only getting started here really 🙂
    And well done on your own blog, it’s slick!

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