A Beginner’s Guide to Keyword Bidding

A Beginner’s Guide to Keyword Bidding

Keyword bidding is the original model for buying advertising on search engines. Let’s explore how it works and how you can benefit from it.

When you bid on a horse race, you check a horse’s past performance and current condition. It involves a fair bit of chance.

When you bid on keywords, you also evaluate past performance to make an informed estimate of positioning. It’s not a game of chance, but it’s not entirely predictable either.

Overview: What is keyword bidding?

Keyword bidding, also known as search engine advertising, is how you get your ad to appear at the top of the results page when someone searches for a keyword. It is the combination of the digital advertising auction model, which is based on pay per click (PPC), and the keyword targeting used by search engines.

You are not really purchasing keywords when you run a PPC campaign; you are participating in an auction that takes place every time a user searches for the keyword. This auction model was first used by revolutionary search engine GoTo, and later adopted and perfected by Google AdWords, today known as Google Ads.

How does keyword bidding work?

For each keyword or group of keywords, advertisers indicate a maximum cost per click (CPC) they are willing to pay for their ads to appear in the first position when people search for that keyword.

Search engines will estimate the quality of the ad and landing page in relation to the keyword. The main criteria used in Google’s Quality Score (QS) is the click-through rate (CTR) on the ad, which can be predicted via machine learning. The higher the CTR, the higher the ad quality.

The ad rank is calculated using the max CPC and the quality score. At the time of the auction, the highest-ranking ad will be shown at the top but only pay a slightly higher click price than the ad just below it. As such, the effective CPC will always be lower than the max CPC that was bid.


In the pay-per-click auction model, the advertiser fixes a max cost per click (Max CPC) for a keyword. The search engine estimates the quality of the ads (QS) and ranks them. In this example, the Ad rank — a function of the quality and the CPC — determines which advertiser will be positioned highest as well as the prices each pay. For illustrative purposes, each advertiser pays 0.01 more than the advertiser positioned below.

How to bid on keywords for your PPC campaigns

Google keyword bidding has been the model for most PPC advertising. Google Ads invented the Quality Score and structures its advertising campaigns into ad groups. Whereas these names are specific to Google, you will find the same mechanisms in all PPC advertising. Let’s go through the steps.

1. Define your target keywords

First, you need to create your advertising keyword list. This is done in a keyword research project during which you find the right keywords, estimate the volumes of searches they represent, and find an estimate of the CPC advertisers pay to appear on them.

2. Group keywords together

Next, group keywords together according to two criteria: the ads they fit with and the intent the user has when using them. Ad groups often emerge quite naturally as a categorization of your campaign.

3. Set your bidding granularity

You can set bids for each keyword, but in many cases, it makes sense initially to set a bid for each category of keywords or even for the entire campaign. They can later be adjusted based on performance.

The pay-per-click auction model is used in most digital advertising today. In this example from Reddit, bids are not attached to keywords but to subreddits. Image source: Author

4. Estimate initial Max CPC

Search and other advertising engines will often recommend the starting keyword price you can bid. But you should look back at your keyword research to find the keyword benchmark it provided.

It is also important to adjust your bids according to the value you expect clicks to generate for your business. You can bid higher on keywords more likely to drive valuable traffic to your site.

5. Adjust bidding based on performance

Once your campaign starts running, you will immediately acquire data on the visibility of your ads and their CTR per ad and keyword. You can now use those insights to adjust your bids up and down to reach your advertising goals. You can also use a keyword bidding tool to do this for you.

4 best practices for keyword bidding

When you are investing in advertising, you want maximum impact. Let’s look at some of the things you can do to achieve that goal.

1. Use several ads

Within an ad group, you can use several ads. It is recommended to make four ads and rotate them to see which one performs the best. You can retest by adding alternatives to the best ad and trying again.

2. Don’t make changes too often

It is important to collect enough data before you make too many changes. It can be difficult to be patient but if you change too many things too often, you will not be able to analyze what worked and what didn’t.

3. Use negative keywords

Once you start to have keyword-related data in your reporting, you can exclude irrelevant words appearing in phrases. If your target keyword was “marketing report” and your ad appeared for “free marketing report,” you can turn “free” into a negative keyword, so you only attract visitors willing to purchase your products or services.

4. Improve your quality score

Keyword bidding is not the only factor that influences your campaign. You need to improve your ads but also the wider user experience, including user behavior once they reach your landing pages. The better the user experience, the higher the quality score and the less you will pay for traffic to your site.

Finding your spot in the competitive landscape

Keyword bidding is an important component of PPC campaigns. It works hand-in-hand with your keyword targeting, your ad creativity, and the customer experience. When you launch a campaign, you need to adjust bidding for a while to find your sweet spot.

When you are set, variations will be less frequent, but to get the most out of your campaigns, remember to keep optimizing your campaigns to adjust for seasonality and competition.

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