AdWords is Google’s flagship advertising product and main source of revenue. Google’s total advertising revenues were USD$23 billion in 2009^[2]. AdWords offers pay-per-click (PPC) advertising, and site-targeted advertising for both text, banner, and rich-media ads. The AdWords program includes local, national, and international distribution. Google’s text advertisements are short, consisting of one headline and two additional text lines. Image ads can be one of several different Interactive Advertising Bureau (IAB) standard sizes.

Sales and Support for Google’s AdWords division is based in Mountain View, California, with major secondary offices in Ann Arbor, Michigan^[3], the company’s third-largest US facility behind its Mountain View, California, headquarters and New York City office.^[4] Engineering for AdWords is based in Mountain View, California.

Pay-Per-Click advertisements (PPC)

Advertisers select the words that should trigger their ads and the maximum amount they will pay per click. When a user searches Google’s search engine on www.google.com or the relevant local/national google server (e.g. www.google.co.uk for The United Kingdom), ads (also known as creatives by Google) for relevant words are shown as “sponsored links” on the right side of the screen, and sometimes above the main search results. Clickthrough rates (CTR) for the ads are about 8% for the first ad, 5% for the second one, and 2.5% for the third one. Search results can return from 0 to 12 ads.^[5]

The ordering of the paid-for listings depends on other advertisers’ bids (PPC) and the “quality score” of all ads shown for a given search. The quality score is calculated by historical click-through rates, relevance of an advertiser’s ad text and keywords, an advertiser’s account history, and other relevance factors as determined by Google. The quality score is also used by Google to set the minimum bids for an advertiser’s keywords.^[6] The minimum bid takes into consideration the quality of the landing page as well, which includes the relevancy and originality of content, navigability, and transparency into the nature of the business.^[7] Though Google has released a list of full guidelines for sites,^[8] the precise formula and meaning of relevance and its definition is in part secret to Google and the parameters used can change dynamically.

The auction mechanism that determines the order of the ads is a generalized second-price auction.^[9][10] This is claimed to have the property that the participants do not necessarily fare best when they truthfully reveal any private information asked for by the auction mechanism (in this case, the value of the keyword to them, in the form of a “truthful” bid).

AdWords Features

IP Address Exclusion

In addition to controlling ad placements through methods such as location and language targeting, ad targeting can be refined with Internet Protocol (IP) address exclusion. This feature enables advertisers to specify IP address ranges where they don’t want their ads to appear.

Up to 20 IP addresses, or ranges of addresses, can be excluded per campaign. All ads in the campaign are prevented from showing for users with the IP addresses specified.

Location-based exclusion is also offered as a method of narrowing targeted users.^[11]

Frequency Capping

Frequency capping limits the number of times ads appear to the same unique user on the Google Content Network. It doesn’t apply to the Search Network. If frequency capping is enabled for a campaign, a limit must be specified as to the number of impressions allowed per day, week, or month for an individual user. The cap can be configured to apply to each ad, ad group, or campaign.^[12]

Placement targeted advertisements (formerly Site-Targeted Advertisements)

In 2003 Google introduced site-targeted advertising. Using the AdWords control panel, advertisers can enter keywords, domain names, topics, and demographic targeting preferences, and Google places the ads on what they see as relevant sites within their content network. If domain names are targeted, Google also provides a list of related sites for placement. Advertisers may bid on a cost per impression (CPI) or cost per click (CPC) basis for site targeting.^[13]

With placement targeting, it is possible for an ad to take up the entire ad block rather than have the ad block split into 2 to 4 ads, resulting in higher visibility for the advertiser.

The minimum cost-per-thousand impressions bid for placement targeted campaigns is 25 cents. There is no minimum CPC bid, however.