Lesson 1: How Search Ads and the Ad Auction Work

Why This Lesson Comes First

Before you spend any money on Google Ads, you need to know what you are paying for. Every Google Search ad gets its place through an auction. Google runs a new auction for every search that your ads are eligible for. If you understand how that auction works, you can read your costs and fix problems later. If you don't, you are guessing.

The whole course uses two example accounts:

• Account A: a local plumber ("Leeds Rapid Plumbing"). It takes calls for emergency and routine jobs in one city.
• Account B: a small online shop ("Wick & Wax"). It sells handmade candles across the UK.

Facts in this lesson come from Google Ads Help pages read on 20 October 2026: About Ad Rank, About the Google Ads auction, Actual cost per click (CPC) and About Quality Score. Google changes its products often, so check these pages again before you rely on them.

From Search to Click: The Steps

This is what happens when someone types "emergency plumber leeds":

1. The person searches. Google gets the search terms plus context: where the person is, what device they use and what time it is.
2. Google finds matching ads. The system collects every ad whose keywords match the search. If Leeds Rapid Plumbing has a matching keyword, its ad is a candidate.
3. Ineligible ads are removed. Google drops ads that can't run here, for example ads targeting another country or ads that break policy.
4. Google calculates Ad Rank. Every remaining ad gets an Ad Rank score for this one auction.
5. The thresholds are checked. An ad has to reach a minimum Ad Rank (the Ad Rank threshold) before it can show. The threshold is usually higher for positions above the search results.
6. Ads are put in order. The ad with the highest Ad Rank takes the top position, the next highest comes second, and so on. Ads can appear above or below the unpaid results, labelled as sponsored.
7. The person clicks, or doesn't. You are charged only when someone clicks. The amount is your actual CPC (cost per click).
8. The next search starts again. Results change from one search to the next because each search is a separate auction with different competitors and context.

What Decides Ad Rank

Google's About Ad Rank page lists these factors:

• Your bid. This is the most you are willing to pay for a click (your max CPC).
• The quality of your ad and landing page. Google measures this at auction time, using expected clickthrough rate, ad relevance and landing page experience.
• Ad Rank thresholds. These are the minimum levels an ad must reach to show at all.
• How competitive the auction is. When two ads have very similar Ad Rank, each has a similar chance of winning the higher spot.
• The context of the search. This covers the search terms, location, device, time of day, and the other ads and results on the page.
• The expected impact of assets. Assets are extra pieces of information shown with an ad, such as sitelinks (links to other pages on your site) or a phone number.

Google does not publish an exact formula. The important point is this: the highest bid does not automatically win. Google says a competitor can bid more than you and you can still get a higher position, at a lower price, if your keywords and ads are more relevant.

Example (the figures are invented to show the idea): Two plumbers bid on "emergency plumber leeds". Plumber X bids £6, but its ad talks about bathroom fitting and links to its homepage. Leeds Rapid Plumbing bids £4, and its ad says "24/7 Emergency Plumber in Leeds" and links to an emergency call-out page. The second ad can rank higher because it is more useful to the person searching.

You may also come across Quality Score, a 1–10 rating Google gives each keyword. Google describes it as a diagnostic tool, not an input in the auction. It is a later topic in this course.

How Your Cost Per Click Is Set

Your max CPC is a ceiling. You usually pay less than it. Google says you pay only what is needed to clear the Ad Rank thresholds and beat the Ad Rank of the competitor immediately below you.

As a result:

• Better ad quality can lower what you pay for the same position.
• Positions above the search results usually cost more, because their thresholds are higher.
• Actual CPC can sometimes be higher than max CPC, for example when a bid adjustment is applied.

Why a Click Is Not a Profit

Paying per click means you pay for visits, not sales. A cheap click that never turns into a sale costs you money. An expensive click that does turn into a sale can still make you money.

Example (invented figures):

• Wick & Wax: 100 clicks at £0.80 cost £80. Two orders of £25 bring in £50 of revenue. With a 40% margin, that leaves £20 of gross profit. Result: a £60 loss.
• Leeds Rapid Plumbing: 20 clicks at £4 cost £80. One emergency job pays £250, and £70 goes on parts and fuel. Result: £100 left after the ad cost.

The plumber's clicks cost five times as much, yet the plumber made money and the shop lost it. Profit depends on cost per click, conversion rate and margin together. Measuring that properly is covered later in the course.

Task: Watch the Auction from the Outside

Do this for both example accounts, or for your own business:

1. Write down three searches a real customer would type, for example "emergency plumber leeds" or "soy candles gift set".
2. Search for each one on your phone, then again on a computer. Note which sponsored ads appear and where they appear.
3. For each ad, write one sentence on how well it matches the search.
4. Using made-up numbers, work out how many sales or jobs you would need from 100 clicks to cover the cost of those clicks.
5. Open Google's About Ad Rank help page and write down today's date next to the factors it lists.

Do not click competitors' ads. Every click costs them money and tells you nothing useful.

Checklist

• I can list the eight steps from search to click in order.
• I compared the ads shown on mobile and on desktop.
• I judged how relevant each ad was to its search.
• I did a break-even calculation using margin, not revenue.
• I wrote down the Ad Rank factors and the date I read Google's page.

Key Takeaways

• Every eligible search starts a new auction. The ad with the highest Ad Rank that also clears the threshold gets the top spot.
• Ad Rank is made up of your bid, ad and landing page quality, thresholds, how competitive the auction is, search context and the expected impact of assets.
• A relevant ad with a lower bid can beat a higher bid.
• Actual CPC is usually what you need to beat the ad ranked just below you and clear the threshold, not your full max bid.
• A click costs money. Only a sale with enough margin turns it into profit.