When you are not happy with your position in Google’s organic search results (the list on the left), you have to study Search Engine Optimization and try to improve your website . You can also use Adwords to get a better visibility in the list on the right. But in that case you will have to pay Google.
Google Adword’s is based on CPC or Cost Per Click. The more people click on your Adword ad, the more you pay. But how Google calculates your CPC is not always clear. Dutch SEO expert Karel Geenen gives us an idea what is happening behind the scenes. Karel’s website is in Dutch, but the presentation gives you a good idea what he is talking about.
Your position
Your position in Google Adwords depends on the so-called Ad Rank. Your Ad Rank is the maximum you are prepared to pay (your max CPC) multiplied by the Quality of your ad. And the Quality of your ad is a combination of the click rate of your add, the relevance of your ad and campaign and the quality of your landing page.
So if you are prepared to pay more and raise your max CPC, or when you are able to improve your Quality, your position will improve.
What you pay
What you pay for each click on your ad depends also on the Ad Rank of your competitor in the position right below yours. Because your actual CPC is the Ad Rank of your competitor devided by your Quality score.
That means improving your Quality score will not only improve your position. Improving your Quality score will also reduce your CPC. However, at the same time your CPC will go up when your competitor is able to improve his Ad Rank by improving his Quality or by raising his max CPC.
So even if your competitor is not able to take over your position, he is able to make you pay more.