The concept of randomized generalized second-price (RGSP) auctions has caused quite a stir within the PPC community following its discussion in the Google antitrust trial. While some digital marketers believe that RGSP provides a better user experience, others, including the Department of Justice (DOJ), argue that it leads to unfair ad auctions and only benefits Google’s deep pockets. In this article, we will delve into what RGSP is, why the DOJ has concerns about it, and how it impacts Google’s ad revenue.
How Does Google Decide the Winner of an Ad Auction?
According to Dr. Adam Juda, Google’s Vice President of Product Management in Search Ads Quality Systems, the highest bidder does not automatically win an ad auction. Instead, a campaign’s long-term value (LTV) is given more weight. This means that Google sometimes sacrifices financial gain in the short term. Rather than solely considering the bid amount, Google uses a metric called Ad Rank to determine the ranking and eligibility of a campaign based on several factors:
- Bid amount
- Auction-time ad quality (expected click-through rate, ad relevance, and landing page experience)
- Ad Rank threshold
- Competitiveness of the auction
- Context of the search query
- Expected impact of assets and other ad formats
Every time a campaign becomes eligible to compete in an auction, its Ad Rank is recalculated, meaning that the campaign’s ranking can vary depending on competition, quality, and search context. Campaigns that do not meet Google’s minimum Ad Rank threshold are automatically eliminated from the auction.
How Does Ad Rank Work?
To illustrate how Ad Rank works, let’s imagine five advertisers competing in an ad auction with Ad Rank scores of 80, 50, 30, 10, and 5. For this auction, Google has set a minimum Ad Rank threshold of 40 to show ads above organic search results. Therefore, only the first two campaigns, with scores of 80 and 50, are eligible to appear above organic search results. Ads that meet the minimum Ad Rank threshold of 8 can be shown below organic search results. In this case, the campaigns with Ad Rank scores of 30 and 10 would qualify. However, the campaign with an Ad Rank score of 5 does not meet the minimum criteria to appear above or below the search results and will be eliminated from the auction.
Why Doesn’t the Highest Bidder Always Win?
If the highest bidder were to win every Google ad auction automatically, there would be a risk of serving poor-quality ads to searchers. Poor-quality ads that are irrelevant to the search query would result in a low click-through rate, conversion rate, and overall user experience. It is in Google’s best interest to show high-quality ads that align with user intent because advertisers only pay when someone interacts with their ads. Higher quality ads tend to lead to lower costs and more advertising success.
Issues with Ad Rank
Without RGSP, ad auctions can become messy. Sometimes, an ad that meets all the minimum criteria required by Google can still rank below an ad that falls short in certain areas. This scenario was illustrated by Frederick Vallaeys, CEO of Optmyzr, who used an example of an ad auction with a 4% threshold for predicted click-through rate (CTR). Despite Ad 2 meeting the threshold with a predicted CTR of 5%, it would still rank below Ad 1 due to its higher Ad Rank score. To address this issue, Google allows ads to be shown in a different order than the norm, leading us to the concept of RGSP.
What is RGSP and How Does It Affect Auctions?
RGSP is a practice employed by Google to randomly pick the winner of an ad auction among the top bidders, as long as their long-term values are sufficiently close. The winning bidder then pays the price equal to the next-highest bid plus one cent. The DOJ argues that this practice is unfair to bidding advertisers since the highest bidder should always be the winner.
Why is RGSP Considered Unfair?
Advertisers face two options if they want to avoid their winning bid being randomly demoted to a runner-up position:
- Improve their campaign’s long-term value
- Increase their bid amount
However, Google has not provided specific guidance on how to increase a campaign’s long-term value, leaving advertisers with just one option—increasing their bid amount. To avoid RGSP, the bid amount would need to be significantly higher than that of the runner-up. As a result, advertisers have had to increase their bids by 3.7 times, according to reports from This Week In Google Antitrust.
Issues with RGSP
Jay Friedman, CEO of Goodway Group, has highlighted the following problems with RGSP:
- An auction scenario where the highest bidder may not win
- No clear instructions on how to increase long-term value
- The need for significantly higher bids to avoid random demotion
The DOJ’s Perspective on RGSP
The DOJ argues that RGSP is being utilized by Google to boost its ad revenue rather than delivering higher-quality ads. They presented an email from Dr. Adam Juda during the antitrust trial, acknowledging the difficulty Google would face…
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