Price Floors.

Reserve Prices.

Bid Floors.

Deep Breath.
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There is an aspect of the Google Ads auction I'd like to dig into, and it's one of those where when you pull on the thread, things just seem to keep unwinding.

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Rethinking PPC Auction Definitions

Let's start by clarifying something about the Google Ads auction: we need another word for "auction" here because the "auction" all of us think about, isn't the same as whatever is happening in Google-Land. I've actually written about this previously (including a semi-helpful analogy of a gas station in some lonely backroads Montana town), and you can check that out here: When Ad Platforms Control the Auction, Return, Data… & Now the Cookie.

I don't mean the mechanics or general idea of a seller with multiple buyers and bids doesn't exist within the Google Ads ecosystem, I mean this: the traditional notion of an auction doesn't mean the primary recipient of the auction winnings is the same entity who controls the system at every standpoint.

There's gotta be another word for that, but at the very least, I believe it's not the traditional auction (think cars, ebay, art, or grandpa's cows) of which we typically think.

I do believe that distinction to be important, because it's in Google's best interest to equate the definitions and it's in our best interest to understand the differences in our unspoken assumptions.

We're playing within Google's closed system here, we're not attending a county fair with multiple distinct entities working within an objective system to purchase steers.

Understanding the PPC Reserve Price Concept

That being said, let's ponder one aspect of the Google Ads auction system, the reserve price.

Unfamiliar with that concept? 

Auctions involve competing parties bidding on an asset based upon the value they assign to that asset.

Some auctions do not have competing parties, so for these, Google Ads assigns a minimum bid by which you, the sole buyer, will pay. That's a bid floor, floor price, or reserve price.

Now, before you brands get out the pitchforks against Google (at least, not yet... that may come later), this is not terribly uncommon in auctions (though, remember what I said about redefining terms... that's important).

Investopedia describes a Reserve Price as such: 

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Google's reserve price has to do with their Ad Rank thresholds, and you can see this delineated out in the below article. BTW, big props to the skilled Greg Kohler (seriously, ya gotta follow that guy) for pointing me to this policy doc in our conversation on Twitter.

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It's pretty important to understand what is happening here, as you may be all sorts of confused by why Google may or may not set your ads as ineligible for auction (as I wrote on here recently: Campaign Auction Eligibility and Performance Max Behavior). Google has thresholds which determine auction eligibility, and they list these out above.

In other words, yes, you may be paying a higher price for an auction than $0.01 even if there are no other competitors.

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Admittedly, some of these thresholds for an inclusion in an auction listed by Google make a lot of sense. I don't think a reserve price is necessarily an unfair practice in and of itself, especially since the concept of reserve prices is common in auctions and allows the seller to decide not to sell her asset if she would prefer to not settle for whatever low price won the auction.

However, my concern that I'll explore more in detail, is that Google's unique market control of every aspect of their "auction" system allows significant opportunity for price manipulation by Google.

Back to their policy doc referenced previously, we read that your reserve price is set by ad thresholds. As we've discussed already, the idea of a reserve price is not abnormal in traditional auction contexts, and thresholds are no different. To put it simplistically, if you want to enter your third grade daughter's art into a multi-million dollar art auction in Manhattan, then you'll likely not meet the required threshold (in this case, whatever they determine to be art worth selling for millions of dollars at a pop).

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But I have some concerns about the ad rank thresholds as listed above, and how those determine reserve price... and that's where we begin to question the bigger picture reality of whether Google should be allowed to be treated as a traditionally understood auction system, specifically in this case, in setting reserve prices.

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Ad Rank Thresholds, What Now?

The concept of ad rank thresholds is a little mind-numbing, but keep in mind that ad rank is what Google determines will ultimately determine your price. This is to prevent an auction system in which the one with the most money wins (because they could simply set higher bids, all the time... regardless of the actual value of that auction.. in order to win or crush competition). The actual concept of ad rank is one I support as it allows more relevant ads and advertisers to pay less money than lower relevancy advertisers and incentivizes advertisers to make more targeted ad experiences for Google searchers... which is a win for all parties!

The problem (as I have written previously which I linked to), is that the two-edged side of ad rank is that can also be used to hide ad fraud since Google can manipulate the system on the back end with no insight whatsoever. Quality Score is the externally facing "check engine light" notice of an advertiser's ad rank strength and many savvy advertisers have scratched their heads as to the confusing realities of high or low Quality Scores that seem to defy reality. There may be perfectly good reasons for those anomalies, but my point is the system is confusing already, so manipulating it so Google magically made $0.03 more per auction just for the heck of it could easily go undetected... while immediately increasing Google revenues.

By the way, someone may (and likely will, on LinkedIn) reply: Google is a business who can do what they like. But if they have presented this as a traditional auction system to advertisers, then I contend that it would in fact be unethical to claim that their auction winnings are composed of a specific system we agree to be a part of... without understanding they can artificially change that pricing at any time. It's different from your local SAAS software raising prices with inflation, because your local SAAS hasn't made a big show about how this is an auction system and you're part of that, and isn't that great, go capitalism, yay!

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My head is spinning... so what about reserve prices and ad rank thresholds? 
I digress.

With ad rank thresholds, we're given certain criteria by which an ad will be eligible to be included in an auction (this is tracked by your impression share, for those really wanting to geek out). In other words, if you are not eligible for auction because you do not meet the necessary ad rank thresholds, then you won't actually show in Search Impression Share results as those only measure impressions for which you are eligible for auction.

But what of the ad rank threshold criteria? Well, this again, is where Google holds the keys of determination, and which may not be entirely accurate.... but these are used to set not only your campaign inclusion, but also your reserve price. See where I'm going with this? 

If the determination of your price for an auction in which you're the only competitor isn't accurately measurable, then there is much opportunity for that price to be inflated... yet with no competitors. Google wins.

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As an example, one of the ad rank threshold criteria listed above to help determine one auction's reserve price is "Related Auctions". Let's pull on that thread. What is to stop the auctioneer, and recipient of the auction winnings (Google is both) to set a higher price than is actually fair. What is the determination for "Related Auctions" when we've all seen how poorly close variant keywords can be at times as "related auctions"? 

Let me illustrate by discussing a car auction. Let's say you go to a car auction and there are nine 2018 Toyota 4Runners for sale (I love me a 4Runner). They all go to excited buyers who bid them up, and on average they cost $33,000. The auctioneer takes note and says "alrighty, we have another SUV coming up here, and this one is an exciting on ! Woohoo! Just like the previous SUVs we just sold, we're going to go ahead and set a reserve price of $33,000 on this one, so you have to start your bid at $33,000. Oh and, by the way, it's not a 4Runner but a 2005 Chevy Equinox with 180,000 miles on it." You look around, everyone else rolls their eyes and doesn't bid on it. It's a "related auction" to those previously, but it's not a fair price and thus, the rest of the market (your competition) is not taking action on it (that's really an important point). You really need an SUV as this is the last available SUV, so now you have to decide whether you actually want to overpay for this, or just give up and walk away. They misidentified a Related Auction, and therefore, overvalued the reserve price the next auction should be set at.

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Back to PPC. "Related auctions" could be used to cause a bunch of people to overpay on non-competitive auctions. I'm not saying they are, just that it's certainly hidden within the system capabilities. Here's the crappy part, even if it's a mistake. Even if it's not purposeful over-pricing, it could still be happening. Heck, in that case, under-pricing could be happening!

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Allow me a Preachy Moment

I've long noted that the hidden system of Ad Rank could easily be used to hide fraud, and I firmly believe this concept of ad rank threshold is the potential fraud delivery system. I am not stating that Google is actively engaged in fraud. I am saying, the system has become increasingly set up for that, and this is one example. A crucial way to prevent fraudulent, or even accidental, mis-pricing from occurring is increased transparency and yet, Google has been moving the opposite direction with data reported back to the customer (Performance Max is the prime example).

We would be foolish as an industry, to assume these reserve prices are always set correctly and there is never any (accidental or purposeful) shifting around that occurs in pricing. Certainly, the mechanism is there to hide this sort of behavior.

The entire concept of an auction is to price an asset at the value the market assigns. If we PPCers are able to identify keyword auctions more valuable to us, that our competition is not targeting, and thus offer our clients/brands more affordable auction prices AND THUS VALUE GOOGLE ADS MORE, then it's a win win. Non-transparent, non-unbiased-third-party assigned reserve prices do not help the industry or advertisers, they only help Google. 

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Our industry revolves around Google, and Google is under investigation on multiple fronts by the US DOJ at this point (this is especially significant, because the US is typically much slower to investigate anti-competitive problems than is the EU), so increased transparency can only help things here.

For the good of the industry.

For the trust of our brands and clients. 

Finally, let's chuck in the obligatory: I'm not an attorney, and this should not be constituted as legal advice. I ponder my understanding of auction mechanics in PPC from my experience here, but as with anything else, this is my opinion and I could be mistaken.

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As I like to say... and may the auctions be ever in your favor (and your reserve prices low).

GOOGLE ADS RESPONSE (2/16/23): 
Ginny Marvin (Google Ads Liaison) wrote the following response on LinkedIn to my post, and I wanted to include it here to give you the most information possible: 
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"Hi Kirk, I wanted to follow up with some clarifications on Ad Rank thresholds & share some resources.

Ad Rank thresholds have been part of the auction for more than a decade. They’re a key quality threshold & we note the use of Ad Rank thresholds when we talk about the auction.

In addition to the definition page, you can find more here:
https://support.google.com/google-ads/answer/1722122
https://support.google.com/google-ads/answer/6366577
https://support.google.com/google-ads/answer/1752122
https://support.google.com/google-ads/answer/6297

In 2017, I covered the last big changes to Ad Rank thresholds to consider query category (e.g. recent news vs. product research) & bid depending on query meaning: https://searchengineland.com/adwords-ad-rank-changes-bid-query-meaning-275000.

Ad Rank thresholds are dynamic & designed to determine the minimum quality & relevance requirements for an ad to show at the top or bottom of the page, or at all. They’re an important piece of the process to help ensure ad relevance.

Also note that Ad Rank thresholds are agnostic of campaign type. They instead depend on factors listed here https://support.google.com/google-ads/answer/7634668 & https://support.google.com/google-ads/answer/1722122"

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