Here’s a quick recap of a recent conversation I had with the owner of a successful small service business here in Southern California:

Mark: Wow. That’s such a unique service. I bet the competition on Adwords (Google’s pay-per-click advertising platform) for your keywords is fairly low.

Biz Owner: Oh, I don’t spend the money on online advertising. I hear Google is too expensive.

Mark: What makes you think it’s too expensive?

Biz Owner: Well, all I know about it is that it’s a bidding war and that competition drives up the click costs too high. I can’t afford to waste the money.

This isn’t the first time I’ve heard that from a business owner. There’s a perception out there that the nature of Adwords (a real-time auction) is inefficient, and therefore doesn’t yield a return on investment. People assume that those with the deepest pockets always win. And because a lot of business owners don’t know any better, they are afraid to get involved with search engine marketing.

Here’s the key thing to remember: quality score has a huge influence on your ads’ position. It’s not just all about how much you bid.

To illustrate how bidding in Google’s pay-per-click marketing program works, let’s go through a very simplified example:

Four companies (Biz A, Biz B, Biz C, Biz D) are bidding on the same keyword. Here are their maximum bids (the highest each company is willing to pay for a click on this particular keyword):

Biz A: $4
Biz B: $3
Biz C: $2
Biz D: $1

In this case, the highest Biz A will ever have to pay is not $4. All they have to do is bid more than the competition. So in this simplified example, Biz A would pay $3.01 – jusy enough to beat Biz B.

Going back to my conversation with that business owner, Adwords is not just simply about bids. Quality score is also influencing the placement of ads (also known as Ad Rank).

Quality score is a combination of:

• Click-thru rate - the percentage of people who see the ad and click it versus the number who just see the ad
• Relevancy of your ad – how well the ad matches the keyword. An ad for a car wash would have low relevancy for the keyword “television”.
• Landing page quality – how relevant and easily navigable is the page that the ad takes the user to? Does it come through on the promise it makes in the ad?

Back to our example, let’s look at the 4 bids plus the quality of the ads (the higher the quality number, the better the quality of the ad):

Biz A: $4   quality: 1
Biz B: $3   quality: 3
Biz C: $2   quality: 6
Biz D: $1   quality: 8

Taking into account quality, when someone searches for that keyword, the Ad Rank (where the ad is positioned) is based on multiplying the bid times the quality score. Here are the Ad Ranks for the four companies:

Biz A: 4    ( $4 x 1 )
Biz B: 9    ( $3 x 3 )
Biz C: 12  ( $2 x 6 )
Biz D: 8    ( $1 x 8 )

What Google then does is rank the ads by the Ad Rank. So here is the order that the ads would be displayed. Notice that Biz A, even though they bid the most, is ranked last because their quality score is so low.

1. Biz C
2. Biz B
3. Biz D
4. Biz A

The bottom line is this: stop thinking about pay-per-click marketing as a bidding war free-for-all. It’s actually much more sophisticated. Sure, having a big budget helps, but knowing how Adwords actually works (or hiring someone that does) will make something you think is too expensive a highly-effective way to get new business.

Business owners: if you geo-target your search ads, or if you’ve ever wondered about your paid search competition in a particular city, then you need to check out SearchMuffin.

SearchMuffin is a very cool and simple-to-use search engine that I’m betting you’ve never used before. To use it, all you need to do is enter a keyword and select a city in the US from a dropdown (there are more than 250 cities to choose from). In return you get a view of Google’s search results for the city you selected. In other words, you can see the ads exactly as they appear as if you were a user in that city.

This is extremely valuable for a couple of reasons. First, you can find out who your competition is in any city. It’s very possible you’ll find competitors you never knew existed. To me, that’s always a positive thing because, good or bad, we can always learn something from our competitors.

Second, you can piece together your competition’s strategy. Are their ads the same in every city, or do they change? Do they bid more aggressively in one city over another? Do they even bid in the same cities as you do?

One more tip: compare what you see in SearchMuffin with the stats in your analytics. Now that you know who is bidding against you in a city, keep an eye on how your conversion rate in that city compares to other cities in your campaign.

So, go try SearchMuffin and let me know what you think.

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