Understanding the Analytics behind Google Adwords

 

If you do multi-channel marketing for your company, then you simply can’t afford to ignore Google Adwords.

In order to get optimum results from your Adwords campaigns, you need:

  • Good practical knowledge of how Adwords really works
  • You need to know how different Adwords metrics are calculated and
  • You need to know, how different campaigns, ad groups, keywords and landing pages are analysed  and optimised for traffic and conversions.

If Google Adwords is a total mystery to you then this article is going to help you a lot. If you are already familiar with adwords reports then also you will learn tricks, which not even many, very experienced adwords optimizers know about.

 

Introduction to Adwords Auction

Whenever a user performs a search on Google (or its search partners), Google run an auction for clicks known as the Adwords Auction.

To participate in an auction you have to bid. Similarly to participate in Adwords Auction, you have to bid on keywords. Each Adwords auction decides ad(s) that will be shown to a user at particular moment in time and ad space.

 

Types of bids in Adwords Auction

There are 4 types of bids which can be placed in an Adwords Auction:

  1. CPC (Cost Per Click)
  2. vCPM (Cost Per Thousand Viewable Impressions)
  3. CPA (Cost per acquisition)
  4. CPV (Cost per view)

 

Cost Per Click (CPC) Bidding

In case of CPC bidding you pay for each click on your ad. CPC bidding is suitable, if you are mostly interested in getting traffic to your website from Adwords Ads.

You can run CPC bidding for search and display ads. You can adjust your CPC bids manually (via manual bidding) or you can let Adwords adjust the CPC bids for you (via maximize clicks or automatic bidding) to get the maximum possible clicks within your budget.

In case of automatic bidding, the bids are automatically adjusted based on: user’s device, browser, operating system, language, location, time of day or whether or not the user is on, one of your remarketing lists.

The advantage of manual bidding over automatic bidding is that, you get more control over bid adjustment. In case of manual bidding, you can adjust CPC bids at the ad group level or for individual keywords or ad placements.

 

Cost Per Thousand Viewable Impressions (vCPM) Bidding

An impression occurs when Adwords auction decide to show your ad to a user at particular moment in time and ad space.

Viewable impression occurs when your ad is actually viewed by a user. 

In case of vCPM bidding, you pay every thousand times your ad appears and is viewable. vCPM bidding is suitable if your main focus is on branding and getting site visibility. You can run vCPM bidding for display ads.

You can adjust vCPM bids at the ad group level or for individual ad placements.

 

Cost Per Acquisition (CPA) Bidding

In Google Adwords, Conversion and Acquisition are same thing. So cost per conversion is same as cost per acquisition.

Cost per acquisition is the maximum amount you are willing to pay for each conversion.

In case of CPA bidding, you still pay for each click on your ad but you don’t manage your bids manually to get conversions. The bids are automatically managed by Google Adwords to get the maximum possible conversions at the CPA you set .

This type of bidding is suitable if you are mainly interested in getting conversions. Use CPA bidding for search, display and shopping ads.

Note: In order to use CPA bidding, you must have conversion tracking enabled in Adwords and your ad group or campaign must have received at least 15 conversions in the last 30 days at a similar rate for at least few days.

 

Cost Per View (CPV) Bidding

In case of CPV bidding, you pay for each video interaction. This video interaction is generally video views but it can also be clicks on Call to action overlay or other interactions recognized by Adwords.

This type of bidding is suitable, if you are mainly interested in getting engagement for your video contents. Use CPV bidding for video ads.

 

Bid Strategy and types

A  bid strategy (bidding strategy) defines how you plan to manage your bids and how you plan to pay for users’ interactions with your ads.

There are two broad categories of bid strategies:

#1 Manual bid strategies – where you adjust your bids manually.

#2 Automated bid strategies – where Google Adwords adjust bids, on your behalf.

A bidding strategy that is applied to a single campaign is called a ‘standard bid’ strategy.

A bidding strategy that can be applied across multiple campaigns, ad groups and keywords is called a ‘Portfolio bid’ strategy (formerly known as flexible bid strategy).

A standard bid strategy can be manual or automated. A ‘Portfolio bid’ strategy is always automated.

 

Automated Bid Strategies

Automated big strategies are used by Google Adwords to adjust bids, on your behalf.

Google Adwords provide 6 different types of automated bid strategies:

#1 Maximize Clicks bidding (formerly known as automatic CPC bidding) – use this bid strategy, to let Adwords get maximum possible clicks for you, within your budget.

#2 Target Search Page Location bidding – use this bid strategy, to let Adwords increase the chances of your ads appearing on the first page of search results or at the top of the first page of search results.

#3 Target Outranking Share bidding – use this bid strategy, to let Adwords automatically adjust your bids, to outrank your competitor’s website in search results.

#4 Target CPA bidding (or CPA bidding, formerly known as Conversion optimizer) – use this bid strategy, to let Adwords automatically adjust your bids, to get the maximum possible conversions at the CPA you set.

#5 Enhanced CPC bidding – use this bid strategy, to let Adwords automatically adjust your manual bids, to get the maximum possible conversions, while still keeping control of your keyword bids.

#6 Target ROAS bidding – ROAS stands for ‘Return on Ad spend’. Use the target ROAS bid strategy, to let Adwords automatically adjust your bids, to get the maximum possible conversion value at the ROAS you set.

 

Difference between Max. CPC, Actual CPC & Avg. CPC

Max CPC is the maximum amount you are willing to pay for each click on an ad.

Actual CPC is the actual amount you pay for each click on an ad.

Avg. CPC is the average amount you pay for each click on an ad.

The actual CPC is usually less than the Max. CPC because you need to pay only that much to Google which is good enough to rank your Adwords ad higher than the advertiser immediately below you.

Actual CPC = Ad Rank of the competitor below / Quality Score of the advertiser

To get a sense of your actual CPC look at the Avg. CPC column in your Adwords reports.

 

Ad position

It is the position of your ad on Google Search Result Page. Your ad can appear on the top of the search result page, on the side of the page or at the bottom of the page.

Ad position of 1 means, your ad is the first ad on a search result page. Similarly, ad position of 8 means, your ad is the 8th ad on a search result page

Higher is your ad position, higher is the probability that searchers will see your ad and click on it. So you should aim for high ad position.

The ad position is calculated by Google Adwords system via ‘Ad Rank‘.

 

Quality Score

Quality Score is a factor used by Google Adwords system to determine how relevant your keyword (on which you are bidding) is to the user’s search query, your ad copy and the corresponding landing page.

Most of the time when we talk about the quality score, we refer to the quality score of a keyword. However we can also have quality score of a display ad or mobile ad.

So there are three types of quality scores in total:

  1. Quality Score of a keyword – it is used when the ads appear on Google Search Network.
  2. Quality Score of display ad – it used when the ads appear on Google Display Network
  3. Quality Score of mobile ad – it is used when the ads appear on Mobile devices.

Quality score is measured as a number from 1 to 10, where 1 is the lowest quality score and 10 is the highest.

Note: Quality score of a keyword is re-calculated each time it triggers an ad. If the quality score of your keyword is very poor (like 1 or 2), your ad may not be eligible for ad auction.

Higher your keyword’s quality score, higher will be your ad position and ad rank and lower will be your first page bid estimates, top Page bid estimates and your actual CPC (i.e. less amount you will have to pay for each click on your ad).

First page bid estimates – it is the approximate CPC bid needed, for your ad to appear on the first page of Google Search result. This bid estimate is based on quality score and current advertising competition.

Top page bid estimates – it is the approximate CPC bid needed for your ad to regularly appear in the top positions on the Google search results. This bid estimate is also based on quality score and current advertising competition.

fig-2-quality-score

The historical performance is the biggest component of Quality score.

Historical performance is made up of:

  1. Historical CTR of your keywords
  2. Historical CTR of your ads
  3. Historical CTR of your ad extensions
  4. Historical CTR of ad formats
  5. Historical CTR of your display URLs
  6. Overall Historical CTR of all the keywords, ads and campaigns in your Adwords account (account history)
  7. Historical performance of your Adwords account in a particular geo-location(s).
  8. Historical performance of your ads on targeted devices (desktop, tablets, mobiles etc).

Note: CTR stands for ‘Click Through Rate’ and is defined as the number of clicks your Adwords ad received divided by number of times your ad was shown. CTR = total ad clicks / total ad impressions.

 

The second biggest component of quality score is ‘Relevancy’.

Relevancy means how relevant your keywords (on which you are bidding) are to the users’ search query, your ad copy and the corresponding landing page. It also means how relevant your ad copy is to its corresponding landing page.

 

The third biggest component of quality score is ‘Landing Page Quality’.

The landing page quality is determined by:

  1. How relevant your landing page is to its corresponding ad copy and the keywords you are bidding on
  2. Landing page load time
  3. And other factors like originality of the contents, navigability etc.

 

Google Ad Rank Algorithm

Google ranks Adwords ads on the basis of Ad Rank. It is calculated as:

Ad Rank = Max. CPC Bid * Quality Score

The ad rank determines your ad position. The ad rank determines whether or not your ad is eligible to appear with ad extensions, site links etc.

fig-1

Here advertiser-1’s ad won’t rank as his keyword’s quality score is very poor (1).

Advertiser-3 has got highest ad rank (12), so his ad will get the 1st position on Google search results page for the targeted keyword.

Advertiser-2 has got second highest ad rank (9), so his ad will get the 2nd position on search results page for the targeted keyword and so on.

In order to rank higher than advertiser-3, you need to achieve an ad rank higher than 12.

You can get a higher ad rank by increasing your Max. CPC bid and/or by improving your quality score. In case your Quality Score is already 10, then the only thing that you can do to improve your ad rank, is to increase your Max. CPC bid.

Off course I have made all of this ad rank calculations, very simple for you. The ad rank algorithm is much more complicated.

 

Secret to getting highest possible return on your Adwords Investment

If you are a beginner in Adwords and your aim is to get highest possible returns on your Adwords investment then you should use CPA bidding as soon your campaign is eligible for it.

If you are an experience Adwords/Analytics user, you should avoid bidding on CPA. This is because Google Adwords use the last ad click attribution model. So in case of Adwords, the last ad click which closed the sales, gets all the credit for conversion.

Average PPC marketers bid only on last click keywords. These are the keywords which closed the sales. They don’t bid on first click and middle click keywords.

First click keywords are the keywords which initiated the sales and middle click keywords are the keywords which assisted the sales.

fig-3

Different keywords (first click keywords, middle click keywords and last click keywords) work together to create a sale.

So in order to get optimum results from your PPC campaigns, you need to bid on all the keywords {first click, middle click and last click keywords}.

If you understand Attribution modelling you will get my point. If you wish to learn more about attribution modeling then you should read the following articles: Attribution Modeling in Google Analytics – Beginners Guide and Google Adwords Attribution

Because of Google Adwords Last ad click attribution model,

The CPA that you see in your Google Adwords report is not your actual cost per acquisition. It is the cost per last ad click acquisition.

So if you ignore first and middle click keywords and optimize PPC campaigns only on the basis of cost per last ad click acquisition, then you won’t get optimal results and sometimes even lose money.

This is because

If a keyword is not completing a sale, it may be initiating a sale or assisting a sale (Always Remember That)

and if you stop bidding on it, because its cost per last ad click acquisition (the so called CPA reported by Google Adwords) is too high or it is not completing any conversion then you may even lose money.

 

Maximum profitable Cost Per Acquisition (CPA)

The very first step toward getting the highest possible return on your investment is determining your Maximum Profitable CPA (Cost Per Acquisition). It is the maximum amount you can pay for each conversion and still maintain your profit margin.

Let us suppose that you manufacture and sell camcorders.

Lets say, you sell camcorders for $900 per item. Let us suppose that the total cost of manufacturing, packaging and shipping a camcorder (including sales tax and other taxes) is $500.

So the amount of money you make (i.e. gross profit) on each camcorder is: $900-$500 = $400

Let us assume, that this gross profit does not include the cost of marketing the camcorders via Adwords campaigns. So,

Profit per Conversion (before Adwords Cost) = $400

In order to remain profitable, your cost per acquisition (or cost per conversion) via Google Adwords campaign must be below $400, otherwise you won’t make any money (profit).

The CPA that you will set, will depend upon your profit margin.

Profit Margin = (Net Profit/sales) * 100

If you operate on high profit margin then your cost per acquisition needs to be low. But bear in mind that maintaining high profit margins can result in decline in overall sales volume. This is because the aim here is, to get the most profitable sales and not highest possible volume of sales.

If you operate on low profit margin then you can afford high cost per acquisition. This is because the aim here, is to get highest possible volume of sales and not the most profitable sales.

FMCG companies like ‘Tesco’ operate on very low profit margin. Since they make less profit per item, they need to sell very large volume of items, in order to remain profitable. Any decline in sales volume, will quickly erase their profit and can result in net loss.

Once you know your profit margin, you can decide your ‘Max. Profitable CPA i.e. the maximum amount you are willing to pay for each conversion and still maintain your profit margin.

Let us suppose that your max. profitable CPA turned out to be $100. Then $100 is the maximum amount you are willing to pay for each conversion and still maintain your profit margin.

If you are a beginner in Adwords use ‘Target CPA bidding’. Start with the recommended bid.

If you are an experienced Adwords user, then use your max. profitable CPA as the target CPA and don’t use the ‘Target CPA’ bidding option. Manage your bids manually, so that you can also optimize for first click and middle click keywords as explained above and keep multi channels attributions into account.

 

Competitive Metrics used in Google Adwords

Competitive metrics are some of the most useful metrics available in Google Adwords for understanding the performance of Adwords campaigns. I generally look at these metrics first, to quickly determine the overall performance of an adwords account.

#1 Search Lost IS (rank) –  it is the estimated percentage of ad impressions on Google Search Network that your ads did not receive because of poor ad rank. So if you see a high search lost IS (rank) percentage then it means the adwords campaigns are managed poorly.

#2 Search Lost IS (budget) – it is the estimated percentage of ad impressions on Google Search Network that your ads did not receive because of low budget. So if you see a high search lost IS (budget) percentage then it means you need to increase campaign budget.

#3 Display Lost IS (rank) – it is the estimated percentage of ad impressions on Google Display Network that your ads did not receive because of poor ad rank.

#4 Display Lost IS (budget) – it is the estimated percentage of ad impressions on Google Display Network that your ads did not receive because of low budget.

#5 Search Impr. Share – it is the percentage of eligible impressions your ads received on the Google search network. Higher the search impression share, the better, as it means your ads are receiving maximum number of the impressions, they are eligible for.

#7 Display Impr. Share – it is the percentage of eligible impressions your ads received on the Google display network. Higher the display impression share, the better, as it means your ads are receiving maximum number of the impressions, they are eligible for.

#8 Relative CTR – Through this metric you can get an idea of how your ads are performing on Google Display Network in comparison to the other ads on the same websites. A relative CTR of 1x means that the CTR of your Display ad is equal to the average CTR of others ads running in the same section on a website.

 

Performance Metrics used in Google Adwords

Following metrics are frequently used to measure the performance/effectiveness of campaigns, ad groups, ads and keywords:

#1 Clicks – number of clicks on your ad

#2 Impr.(impressions) – number of times your ad is seen by people.

#3 CTR (click through rate) – it measures how often people click on your ad, after it is shown to them. CTR measures the effectiveness of your ads. CTR = ad clicks / ad impressions.

#4 Avg. CPC – it is the average amount you pay for each click on an ad.

#5 Avg. CPM – it is the average amount you pay for every thousand impression of your ad.

#6 Cost – it is the sum of total ad clicks cost and total ad impressions cost. It does not include other costs like cost per call.

#7 Avg. Pos.- it is the average position of your ad.

#8 Total Cost – it includes all types of costs (total ad clicks cost, total ad impressions cost, total phone cost)

#9 Engagements – number of times a person expands your lightbox ad.

#10 Engagement rate – it measures how often people expand your lightbox ad, after it is shown to them. Engagement rate measures the effectiveness of your lightbox ads. Engagement rate = total engagements / total ad impressions.

#11 Avg. CPE (cost per engagement) – it is the average amount you pay for each ad engagement.

#12 Views – it is the number of times your video ads were viewed. Google Adwords count only those views where a person has watched at least 30 seconds of video (unless the video itself is shorter than 30 seconds)

#13 View rate – it measures how often people watch a video, after the corresponding video ad (including thumbnail) is shown to them. View rate measures the effectiveness of your video ads. View rate = total views / total ad impressions.

#14 Avg. CPV  (Cost per view) – it is the average amount you pay for each video view.

#15 Avg. Cost  – it is the average amount you pay for each ad interaction (ad clicks, video views).

#16 Interactions – it is the total number of ad interactions (ad clicks, video views)

#17 Interaction rate – it measures how often people interact (click, view) with your ad, after it shown to them. It measures the effectiveness of your ads.

#18 Video played to: 25%, 50%, 75%, 100% – it measures the percentage of people who watched video of particular length (25%, 50%, 75%, 100%). So if video played to 50% is 10%, then it means, 10% of people watched 50% of the video.

 

Conversion Metrics used in Google Adwords

Once you have set up conversion tracking in Google Adwords, you can then see all of the following conversion data for your adwords campaigns, ad groups, ads, ad placement and keywords:

#1 Conversions – it is the number of conversions (sales, leads, signups, downloads or any action you defined as conversion) generated by your campaign, ad group, ad or keyword. It does not include cross device conversions.

#2 Cost/conv – it is the average amount you pay for a conversion (excluding cross device conversions)

#3 Conv.rate -it is the percentage of ad interactions (clicks, views) which resulted in a conversion.  It measures, how often an ad interaction resulted in a conversion.

#4 All Conv. – it includes all of the conversions reported in the ‘conversions’ column + additional conversions (like cross device conversions)

#5 View-through conv.- It is the conversion triggered through an impression (viewing) of a display network ad that has not been clicked in the last 30 days.

#6 Cost/ all conv – it is the average amount you pay for any type of conversion.

#7 Cross-device conv. – it is the total number of cross device conversions. In case of cross device conversions, an ad interaction (click, view) take place on one device and the resulting conversion takes place on a different device or browser.

#8 Converted clicks – it is the number of unique ad clicks which resulted in one or more conversions.

#9 Cost / converted clicks – it is the average amount you pay for each converted click.

#10 Click conversion rate – it is the percentage of total ad clicks which resulted in converted clicks. It measures, how often a click on your ad resulted in a conversion.

#11 Total conv. value – it is the total value of all of your conversions.

#12 Value / conv. – it is the average value of a conversion.


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Himanshu Sharma

Certified web analyst and founder of OptimizeSmart.com

My name is Himanshu Sharma and I help businesses in finding and fixing their Google Analytics and conversion issues.
  • More than ten years' experience in SEO, PPC and web analytics
  • Certified web analyst (master level) from MarketMotive.com
  • Google Analytics certified
  • Google AdWords certified
  • Nominated for Digital Analytics Association Award for Excellence
  • Bachelors degree in Internet Science
  • Founder of OptimizeSmart.com and EventEducation.com
I am also the author of the book Maths and Stats for Web Analytics and Conversion Optimization If you have any questions or comments please contact me