Vickrey Second Price
by William Charlwood
Author: The Definitive Guide
to Google AdSense
When you bid for a keyword to trigger the
display of your ad on Google, you are participating in a real
time Vickrey Auction.
Okay, so now you know the name, what the heck is
a Vickrey Auction? Naming, after all, is not explaining.
A Vickrey Auction is where the highest
bidder wins - but he/she only pays the second highest bidding
Let's say there's an auction of 3 people
A bids $1.00
B bids $1.15
C bids $1.45
In this case, C wins the bid but pays only
So why would anyone selling anything want to
sell via a Vickrey Auction when it seems they don't get the best
price that way?
The answer is that they do - provided everyone
who is bidding knows what is going on. In Google's case,
this is far from the truth at the moment but by the time you've
finished this article you will be one of the few who do and it
could help you plan your AdWords campaigns better.
If you participate in a Vickrey Auction, you can
safely bid the maximum price that makes sense to you in the
knowledge that if you win, you will pay less than this.
If everyone understands this, they will all bid the maximum they
can afford and the seller does very nicely. Furthermore, no one
ends up paying more than they can afford.
This process also keeps people in the bidding
who would otherwise be nervous of pitching too high.
At the moment very few people understand what is
really going on behind Google's bidding process and therefore
the prices that people bid are often well in excess of what they
are really prepared to pay. In fact, unless you are
operating in a highly competitive area, you can generally
afford to bid high provided no one else is adopting a similar
tactic. Here's why.
Why it can be dangerous to bid high
Google uses a variation on the Vickrey Auction
model to determine how much you pay when your ad is clicked.
Let's look at the situation when three people again are bidding.
A bids $1.20
B bids $2.50
C bids $1.21
B wins the bid, but Google sets the price paid
at 1 cent ABOVE the next highest price. In this case then B has
to pay $1.22 for the click. This is well below the price he bid.
Now it may be that B simply set his price high
because he thought that $2.50 would guarantee top slot and that
everyone else would be bidding much lower which in this case was
But suppose C also adopted the same philosophy
and bid $2.30 instead of $1.21.
A bids $1.20
B bids $2.50
C bids $2.30
In this case, B would still win - but would have
to pay $2.31 for the click this time.
This shows why it is dangerous to bid too high
just to achieve a high ranking. You can't always assume
you will pay much less than your maximum bid price.
2 additional Google twists
Just to make the process more complex, Google
adds a couple of twists to this process too.
In the above examples, we talk about bid prices
measured in dollars and cents. In practice, Google uses a
different "currency". Let's call it your bidding
Your bidding power is equal to your bidding
price multiplied by your ads popularity for the relevant
keyword. What this means is that your bidding power doubles
if you run ads that achieve twice the click through rate of
competitor ads for a given keyword even if you are bidding
exactly the same amount of money per click.
Bid price $2.12
Bidding power = 414
Bid price $2.12
Bidding power = 212
When you bid in Google's real time auction for
an ad, it is your Bidding Power and not simply your
bidding price that determines where your ad will rank.
If you get a high CTR, you can still have a
higher Bidding Power than your competitor who is bidding a
higher price than you. This is why it pays to
have ads that get the clicks.
How this fits with the Vickrey Auction
The model is the same as the dollar-only model
we first discussed but this time, instead of costing you dollars
and cents per click, you get charged an amount of Bidding Power.
A bids 400 Bidding Power Units
B bids 300 Bidding Power Units
C bids 349 Bidding Power Units
A wins the bid but pays only 350 Bidding Power
Units. (1 more than the 2nd highest bidders bid of 349)
Google charges A in dollars and cents so how
much does he pay?
The answer depends on his Click Through Rate.
If he has a CTR of 1% he will pay $3.50 because 350 x 1 =
On the other hand, if he is achieving a CTR of
5% (which is what top performing ads can achieve), he will pay 70
cents (70 x 5 = 350)
The second complexity that Google adds to this
system is that a similar process goes on for each bidder in
order to determine the final order in which ads appear.
Finally don't forget that the click through rate
you achieve for each keyword will depend in part on the ad that
gets displayed for the keyword. You need to maximise this
and the best way to do this is to run several ads at a time and
see which ones generate the highest click through rates.
Part of the process of managing your account is
to delete poor performing ads and create ads that beat your best
performing ad to date.
Key learning points
Treat your Click Through Rate at least as
importantly as your Maximum Cost Per Click price.
Don't over bid for keywords unless you
are sure no one else is doing the same.
If you'd like a free list of 1,000 high paying
keywords, just sign up for The AdSense Insider newsletter and
AdSense training course - it shows you how to make money from
Google AdSense and then grow your earnings.
|All the best
PS At the end of the course I'll
send you as a gift a $19.95 bonus Special Report that
you can also use to start your own online automatic business (I'll
show you exactly how too - it's easy.)
PPS I'll also send you a link to
the original Google design specification by Page and Brin. It
tells you the facts about Google's search engine that few people
is the author of a number of publications about AdSense including:
- The Definitive Guide to Google AdSense
- How to make High Paying Keywords work
- AdSense versus Affiliate
programs: which pays more
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