Introduction to Google Ads Algorithm

The Google Ads algorithm is one of, if not the most, complicated algorithms in the entire paid media landscape. The algorithm itself has changed drastically with the introduction of Performance Max, broad match keywords, and the different variations of match types that have been introduced in recent years.

Understanding the Fundamentals

This algorithm is not completely a black box—while there are definitely certain things and complexities that we may never know, the reality is that you need to understand the fundamentals of this algorithm to ever manipulate it and give it what it needs to drive the maximum return for e-commerce businesses.

Six Core Elements of Google Ads Efficiency

There are essentially six elements that play into maximizing your return on ad spend (ROAS) or overall efficiency on Google Ads:

Intent
Relevance (drives to a CPC)
CPC
Conversion Rate
Cost Per Acquisition
Average Order Value → ROAS

Why Relevance Is Critical

The most critical part of any ad placement is your relevance. Relevance is the name of the game when it comes to Google Ads. Many people think it’s just about headlines or primary text—but it’s everything.

Relevance Explained Using a Real Example

Take the example of running shoes. There are a bunch of competitors: Nike, Adidas, Uggs, and many more. Google has to determine the most relevant advertiser to display.

How Google Measures Relevance

Relevance is determined by how likely the user is to enjoy the website experience (bounce rate, conversions, etc.). Advertisers get graded and ranked—top performers have engaging ad copy and highly relevant landing pages.

Intent: A Major Shift in Advertising

User intent has become the biggest change in advertising in the last 2–3 years. Instead of just keywords and relevance driving CPC, it’s now intent × relevance = CPC.

How Google Detects Intent

Google leverages data from Chrome, Gmail, G Suite, and other sources to predict buying behavior, often before the user even realizes it.

High vs. Low Intent Costs

Users with high intent cost more. If you bid low, you’ll get low-intent users, which aren’t worth much even if they’re using the right keywords.

How Relevance Affects CPC

If you have high relevance, you get a cheaper CPC. Low relevance = higher CPC. The formula is simple:

High Relevance = Low CPC
High Intent = High CPC

Advertiser Positioning and CPC Impact

If you’re the top advertiser with perfect relevance and want to go after high-intent users, you’ll pay a high CPC—but less than a lower-relevance advertiser targeting the same intent.

Multipliers and Their Effect on CPC

Advertisers fall across a spectrum. Most fall in the middle. For example, a middle-tier advertiser might have a multiplier of 3 (3×10 = $30 CPC), while a high-tier one has 1×10 = $10 CPC.

Conversion Rate (CVR) Based on Intent

Higher intent users convert better. Lower intent users may have a 0.1% CVR, making them almost worthless.

Four Quadrants of Intent and Relevance

There are four combinations:

Low Relevance + Low Intent = Very Cheap, Very Ineffective
High Relevance + Low Intent = Cheap and Somewhat Effective
Low Relevance + High Intent = Expensive, Risky
High Relevance + High Intent = Expensive but Best Converting

Why High Relevance Matters So Much

High relevance consistently leads to higher CVR, more effective cost, and better campaign results. For example, $4 CPC with 1% conversion = $400 CPA.

ROAS Formula and Impact

Return on Ad Spend (ROAS) = Total Revenue ÷ Ad Spend
Higher Average Order Value (AOV) often comes from high-intent users. Well-optimized pages and high-quality scores improve both relevance and AOV.

Setting Your ROAS Targets

How you set targets affects:

Spend volumes
Keywords triggered
This is especially true for Performance Max, Shopping, and broad match keywords.

Target ROAS (tROAS) and Profitability

If your break-even is 2.5x ROAS, setting your target at exactly 2.5x means you’ll get some conversions below and some above. That’s risky—50% of your customers might be unprofitable.

Setting Above the Break-Even

You might need to set your target at 3x to ensure most conversions fall above 2.5x ROAS. This creates a buffer and allows for sustainable growth.

How ROAS Targets Impact Keyword Bidding

Higher targets limit reach to only the most lucrative/high-intent keywords (e.g., “Jordan”). Lower targets broaden the keyword net but may hit lower-intent or irrelevant terms (e.g., “socks”).

Finding the Sweet Spot

Set your goals based on what your business actually needs, not arbitrary advice. Mid-level targets (like 5x) allow for balanced reach, conversions, and profitability.

Final Thoughts

The key to long-term success in Google Ads:

Understand how Google prices CPC
Adjust your relevance, landing pages, and conversion rates
Set your ROAS targets based on true break-even/profit thresholds
Continuously monitor and adjust based on real business goals
How to setup Google Ads campaign in 2025

How Google Ads algorithm works in 2025