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What is Google AdWords?
To understand how AdWords works, it's important to familiarize yourself with some key building blocks -- like keywords, placements, Ad Rank, bids, and Quality Score.
How keywords trigger your ad to appear
Keywords are words or phrases you choose that can trigger your ad to show on search and other sites. For example, if you deliver fresh flowers, you could use "fresh flower delivery" as one keyword in your AdWords campaign. When someone searches Google using the phrase "fresh flower delivery" or a similar term, your ad might appear next to Google search results.
Placements: Advertising on non-search websites
Keywords can trigger your ads to appear next to search results on Google and other search sites. But keywords can also trigger your ads to show on other sites across the Internet -- Google-owned properties like YouTube and Google's partner sites. We call these "placements." A placement can consist of an entire website or just part of a site. And these websites are all part of what Google calls the Display Network.
Google can automatically determine where your ads appear by matching your keywords to websites in the Display Network. Or, if you'd like greater control over where your ads appear, you can pick specific placements yourself. You can set bids for each and choose the sites where your ads might appear.
Ad Rank: How Google determines which ads appear in which positions
Now let's suppose that multiple advertisers use the same keyword to trigger their ads or want their ads to appear on the same websites. How does Google determine whose ads will appear and in which order? It's done automatically, based on what they call Ad Rank.
Your Ad Rank is based on a combination of your bid (how much you're willing to spend) and your Quality Score (a measurement of the quality of your ads, keywords, and website). Depending on where your ad shows and the type of targeting that you use, the formula for Ad Rank can vary a bit, but it always incorporates bid and Quality Score.
A bit about bidding and Quality Score
Your bid and Quality Score can work slightly differently across different campaigns types. Here are a couple of examples to help illustrate.
With a keyword-targeted ad on Google and its search partners, your bid would be your maximum cost-per-click bid -- the maximum amount you're willing to pay for each click on your ad. Your Quality Score is based on the relevance of your keywords, the quality of your landing page, your ad's clickthrough rate (CTR), adjusted for its position on the page, and a few other factors.
At the end of the day, what you pay
You'll always pay the lowest amount possible for the best position you can get given your Quality Score and bid. To find this amount, Google looks at the Ad Rank of the ad showing in the next position (for example, for ads appearing on a Google search page, this would be the position just beneath your ad), and only charges you the lowest bid amount that would have beaten that ad's Ad Rank, rounding up to the nearest cent. So regardless of your bid amount, you'll only pay the minimum that's needed to beat the advertiser below you.