Over at Inside AdWords, Google's Chief Economist, Hal Varian has posted some additional insights about Quality Score and the AdWords Auction.

Google users want ads they see to be relevant. They don't want to be bothered by ads that aren't closely related to what they are searching for.

- Hal Varian (Chief Economist, Google)

Traditional Auction

In a traditional auction, ad positions would be determined exclusively by bids.

Many people make the mistake of thinking that AdWords follows a traditional auction model where the highest bidder takes the highest position. This can lead to an endless cycle of bid increases that doesn't result in better positions or ad performance. As you'll see, in the AdWords auction, lower bids can take higher positions and earn more clicks for less money.

Google's Second Price Auction

In a second price auction, the buyer doesn't have to pay their full bid. They only have to pay the amount of the next highest bidder below them.

AdWords uses a second price auction. Put simply, this means that the highest bidder only pays the price that was bid by the next highest bidder.

Because AdWords is a second price auction, it's important to understand the competitive landscape of the auctions in which you participate. In other words, it's useful to know what other advertisers with whom you are competing are willing to pay for clicks.

More Useful Ads in a Higher Position

We consider some other factors in addition to an advertiser's bid.

The fact that AdWords isn't based solely on bids is probably the most misunderstood part of their ad auction. Google's estimate of the quality of your ads, keywords and landing page (Quality Score) can have a tremendous impact on the performance of your AdWords campaigns. These are the major factors that go into Quality Score:

Expected clickthrough rate - Prediction of how often ad will be clicked on when shown.

In my experience, expected clickthrough rate is probably the most significant factor in determining Quality Score. Which makes sense. Google makes money when ads get clicked. So, they want to show ads that are most likely to get clicked in the most prominent positions.

There are a variety of things you can do to improve the clickthrough rate of your ads. Generally speaking, the more relevant and enticing your ads are to users who see them, the higher the clickthrough rate.

With some simple settings configuration, you can see Quality Score inside your AdWords account.

Landing page experience - Does your landing page help user find what they're looking for? A higher relevant landing page yields a higher score.

The landing page is the page that users "land on" after clicking an ad. Landing pages that are more relevant and provide unique content are rewarded with higher quality metrics. You should also make your landing pages easy to navigate. If your landing pages are difficult to use, they are more likely to click back. Google uses this user feedback to calculate the quality of your ads.

Finally, you should include information about how you intend to use your visitor's information. Providing transparency with a privacy policy and terms can also impact the Google's perception of the quality of your ads.

Ad relevance - How well does the language in your ad relate to the user's query?

Ad's relevance to a user query is one of the most influential factors on clickthrough rate. It makes sense that Google expend so many resources on language analysis technologies. This is at the very core of managing successful AdWords campaigns.

But simple word relevance isn't the only thing at play here. You should think about whether the keywords you are bidding on and your ads match in terms of the searcher's intent. In other words, what exactly is the user searching for?

Expected Impact of Ad Formats

Ad formats are visual enhancements that provide additional information about your offer. Common examples are:

• Phone numbers
• Google+ endorsements
• Ad sitelinks
• Location information

Like ad relevance, ad formats can have a significant impact on whether or not your ads get clicked. And by now, you should understand that clickthrough rate is probably the most important factor upon which to focus to improve ad performance.

Failing to use appropriate ad formats puts you at a considerable disadvantage in auctions in which your competitors are taking advantage of them.

Ad Rank

All of these factors together comprise Ad Rank. This is the metric that Google uses to ultimately determine the position of an ad (or whether the ad appears at all).

No matter how high you bid, if your Ad Rank is sufficiently low, your ads will not show at all!

True Cost of a Click

Now that you understand the multiple factors that go into Ad Rank, you should understand that the bid you place for click can be greatly different from the price you ultimately pay for it.

If there's any "magic" to managing paid search campaigns, this is it. Experienced paid search managers are able to improve their clients' Ad Rank, obtain better positions and reduce click costs. This can ultimately lead to a lower cost per acquisition.

In the context of AdWords for lawyers, this means acquiring new clients for a lower cost than your competitors!