Chuck Topinka recently wrote an article for Quora that was shared on Forbes talking about exactly how AdWords works, and along the way, he pointed out that having a QS of 10 meant that you basically control a keyword auction. *
Your Google Quality Score is a major factor in determining your ad cost as well as your ad rank. Ad rank is a bit of a misnomer because it is a number used to determine the placement of your ad following an auction, assuming the ad shows up. The formula for determining ad rank is:
Ad Rank = Quality Score * Bid
Here’s the important part: the higher the Quality Score, the higher the ad rank is, even if the bid remains the same. For example, let’s say you have an average QS of 5 and you bid $10. Your ad rank will be 50. However, with the same exact $10 bid and a QS of 10, your ad rank is now 100. This means that people with high quality scores can bid a lot less and still end up having their ad show.
Now that you understand how QS can improve your ad position without increasing your cost, we’ll explain how a high QS can also allow you to spend less for your ad, even if it’s in a top position.
The formula for determining how much an ad will cost is:
Cost = Ad Rank to beat / Quality Score + $0.01
We’re going keep using the QS 5 and QS 10 examples from before because it keeps the math easy. Let’s say that the QS 10 person wants to be absolutely sure that they will get the top position, so they go nuts and bid $100, giving them an ad rank of 1,000. You might assume that for the QS 5 individual to beat the QS 10 individual they’d only need to bid $101. However, due to the formula, they’d need to bid a substantial amount more. 1,000 ad rank / QS 5 + $0.01 = $200.01.
It’s important to note that the cost of an ad is only what you have to pay based on beating the second ranked ad by $0.01. Therefore, you could technically bid a million dollars but only pay $10 for an ad if that’s all it took to beat out other ads.
* Google has a very business auctioneer because every time someone does a keyword search, an auction takes place among all of the users competing to have their ads show up along with search results. The results of the auction determine the click cost as well as the placement of each ad.