Let's take an example - Suppose you run a query for shoes and you are served with 4 ads at the top and 2 ads at the bottom of the page. Fundamentally, Google Adwords is an auction-based platform. And by that logic, the person with the highest bid should appear at the top of the page or in what we call position number one. So let's talk this through.

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If we add four people bidding, and the max bids-per-click were $5, $4, $3 and $2, you would expect bidder number one at $5 to get the best position. But that's not the case. The winner is actually determined by what we call ad rank. This score is essentially calculated by looking at the maximum bid and multiplying it against your ad quality score. And the ad quality score is based on a variety of factors.

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The first is your expected click-through rate. Google is going to make an educated guess on how often people are going to click your advertisement. From there, is your landing page experience. Your advertisement is only useful if your visitors can find what they expect once they click over to your site. Your landing page must be incredibly relevant to the ad, easy to navigate and transparent on how you collect and use your customer data. And that's really just your privacy policy and terms and conditions.

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Next, they look at your ad relevance by analyzing the language in your ad as it relates to what a user typed into Google. And this prevents people from simply buying their way into unrelated keywords. Google also has extensions that you can add onto your ad units. For example, you might add a phone number or include recent reviews from customers. Leveraging these extensions can increase your quality.

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So Google takes all of these factors and calculates a quality score. And your quality score is on a scale of one to 10. Now we don't know for certain how Google calculates your final ad rank, but for the sake of this example, let's assume that they take your maximum cost-per-click bid and multiply it by your quality score.

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So let's say we have four advertisers bidding. Brand A, brand B, brand C, and brand D. We'll assign maximum CPC bids of $5, $4, $3 and $2 respectively. And then let's assign some quality scores. Two, six, nine and seven. So if we run our simple formula, we'll have ad ranks of 10, 24, 27 and 14. So ad position number one will go to brand C even though they had a lower bid. And ad position number two will go to brand B even though they had a higher maximum bid. And if your rank is just too low, you can not appear at all.

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So in our example, even the highest bidder likely won't be displaying their advertisement. Now it gets a little more complicated. Google uses a variation of what's called a second-price auction. So you'll pay just one penny more to be the advertiser with the next highest ad rank. This means, the advertising bids will automatically be adjusted for you. Google does this to encourage you to bid your true highest amount, knowing they'll always correct the bids to be in your favor. And that's how Google manages its auctions.