Google’s Brilliant Pricing Scheme

Have you ever wondered how Google determines pricing for Adwords advertisers?

They use a very clever pricing scheme that rewards advertisers financially for providing highly relevant ads for search users. The more relevant the ad (as measured by click-through rate) and the more relevant the landing page (I assume measured by time on site, or bounce rate) the lower the cost to the advertiser. It is an elegant mechanism to lookout for the interests of three different stakeholders simultaneously – Google users, Google advertisers, and … Google. All business should seek such harmony.

This video, hosted by Hal Varian, Google’s chief economist, provides an excellent explanation of pricing mechanism and the concepts of quality score, and ad rank.

Originally published June 2011