Business Today

How Google makes its billions

Google’s process for placing ads is revolutionising the online advertising industry. Here’s how it determines both price and ad slots on its website.

     Print Edition: September 6, 2009

Google’s process for placing ads is revolutionising the online advertising industry. Here’s how it determines both price and ad slots on its website.

1. ESSENTIAL INFO: Any company keen on advertising on Google needs to know that the success of its ad hinges on three things: the price it is willing to pay; key-words in the search that it would like to bid on; the quality of its website. Unlike in conventional advertising, the price is not the most important criteria. Quality of the advertiser’s website is also important. Also, an advertiser pays only when a web surfer clicks on its ad.

2. QUALITY CONTROL: The quality of the website which an ad-click leads to is a key determinant of where the ad will rank and how much it will cost. While the process through which quality is determined is a secret, it most probably depends on a variety of factors such as relevance of the site vis a vis the search terms, its “look and feel” and “bounce rate” (speed at which a surfer navigates away from the webpage).

3. HOW IT WORKS: We conjured up three travel websites to work as examples. We assumed that all three sites were bidding for the search terms “travel”, “ideas” and “India”. For simplicity sake, we made all three of our advertisers bid Rs 100 for an ad slot. Google figures out that ultracoolindiatrips is very pertinent to the search terms as well as easily navigable, and awards it 9 quality points. Indiatravelforum is appropriate, but finding what you want is a hit or miss experience. It gets7 points. Dirtcheaptickets is a straightforward ticket purchasing site so Google doesn’t think it’s relevant at all, except for the fact that it has a unique “write about your trip” section that is extremely popular and useful for a prospective traveller. It gives the site 5 points.

4. THERE’S GOLD IN THAT EQUATION!: Remember the famous Black-Scholes Option Pricing equation, that powered a revolution in finance and derivatives and won the authors a Nobel prize? Well, Google has come up with its own (infinitely simpler) formula for figuring out how to price its ads that promises to revolutionise the online advertising world. Here it is:

Price paid by advertiser = [Amount of Next Highest Bid + Quality of Next Highest Bid] / Quality of Advertiser’s Bid

AND THE WINNER IS...
ultracoolIndiatrips, naturally. It had the highest quality score despite having the same bid amount as the other two, and therefore came in first. It will pay only Rs 78—an amount which factors in the next highest bidders bid amount and quality score. Indiatravelforum ends up paying Rs 71 for the second ad slot.

Dirtcheaptickets, which gets the third ad slot, actually ends up paying Rs 96, much more than the other two sites because of its lower quality score (assuming a fourth bidder who wouldn’t show up but placed a losing bid of Rs 80 but a quality score of 6.) In other words, someone with a lower bid price but a higher quality score can outrank someone who upped the ante on the bid, but whose site sucked.

REMEMBER:
A higher quality score can actually drastically reduce the amount an advertiser pays. In fact, the top-placed advertiser might end up paying less than the secondplaced advertiser simply because of quality.

Also, this is an automated process and takes place thousands of times every second, even for the same term. Advertisers can “tweak” their bids on the online system and can set thresholds and caps on bids. This is a democratic process according to Google and does not penalise smaller companies.

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