Google Describes How They Print Money

Ad auctions key to fairness, and wealth

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The auction-based process used by Google and other search advertising companies sets the keyword price for ads, in a way that Google’s chief economist described as an efficient and equitable process.

Without the ad auction, millions of keywords would have to be priced by hand. Google’s Hal Varian said on the official Google blog the task would be impossible.

"Using an auction removes the burden of having to do this: the prices are determined by the auction participants," Varian said. "These auctions run every time a user enters a query, so they always reflect the current values that advertisers place on keywords."

In the process, where all of the ads for a particular keyword have the same Quality Score ranking, the bidding process determines the order of presentation for those ads. The high bidder gets the best placement.

The key to Google’s rich profits, though Varian doesn’t refer to it this way, comes from the bidding process. "Advertisers bid for position and pay just enough to beat their runner-up. Prices for keywords are, ultimately, determined by the advertisers," he said.

As in most things in life, whoever has the most money wins. Webmasters with smaller sites competing against a richer one for the same keywords will lose each time, unless the deeper-pocketed business has a bunch of incompetents handling the bid-setting process.

The key for smaller sites in competition is the same online as it is in the physical world. One isn’t going to run a small hardware store alongside a Wal-Mart and hope to beat them on price. But if they fill a niche the big competitor does not address, say for a specific tool for a unique purpose, they have a chance.

That applies to keyword buys. If you’re running headfirst into the maw of a wealthier competitor, you might need to rethink your business model. All trying to outspend such a foe does is to make Google richer. Bid smart.

Google Describes How They Print Money
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