(Cross-posted from the Inside AdWords Blog)
When we go to conferences or read posts in forums, we find that advertisers sometimes know more about advanced features than about the basics of how AdWords works. So, we've decided to take some time to get back to basics and talk about how the AdWords auction actually works. To help you, we've brought along our Chief Economist, Hal Varian, to walk you through the auction and explain how your maximum cost-per-click (CPC) bid and Quality Score determine how much you actually pay for an ad click on Google's search results pages.
When people think of an auction, they often think of a prize being sold for the highest bid. But the AdWords auction works a little differently, where the winner only pays the minimum amount necessary to maintain their position on the page. That means you'll only pay the minimum necessary to beat the person below you. In fact, our quality-based pricing system ensures that you'll often pay less than your maximum bid.
How exactly does this work? We'll leave that to Hal to explain.
If you have trouble viewing this video, you can watch it here.
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