Every PPC practitioner learns the same formula early on. Your actual cost per click is the Ad Rank of the competitor below you, divided by your Quality Score, plus £0.01. It has been taught in certification courses, agency onboarding docs and conference talks for well over a decade.
So is it still accurate in 2026? Mostly, yes. But the auction underneath it has changed enough that treating the formula as literal maths will lead you astray. Here is what still holds, what has changed, and what it means for how you manage accounts.
The classic formula
The textbook version looks like this:
Actual CPC = (Ad Rank of the competitor immediately below you ÷ your Quality Score) + £0.01
In other words, you never pay your full bid. You pay the minimum needed to beat the advertiser one position below you, discounted by your own quality. A quick example with three bidders:
| Bidder | Quality Score | Max Bid | Ad Rank | Actual CPC |
|---|---|---|---|---|
| Bidder 1 | 10 | £5 | 50 | 40 ÷ 10 + 0.01 = £4.01 |
| Bidder 2 | 8 | £5 | 40 | 30 ÷ 8 + 0.01 = £3.76 |
| Bidder 3 | 6 | £5 | 30 | Pays the reserve price |
Notice that all three bidders offered exactly the same £5. Bidder 1 wins the top spot and pays less per click than Bidder 2, purely because of quality. That principle is as true today as it ever was: quality is a pricing discount, not just a ranking factor.
What has changed: Ad Rank is no longer Bid × Quality Score
The old shorthand of Ad Rank equalling bid multiplied by Quality Score is years out of date. Google currently lists six factors that determine Ad Rank at auction time:
- Your bid
- The quality of your ad and landing page, evaluated in real time
- Ad Rank thresholds, the minimum quality and price bars your ad must clear
- The competitiveness of the specific auction
- Search context: the user’s device, location, time of day and other signals
- The expected impact of your ad assets and formats
The important nuance is that the 1 to 10 Quality Score you see in your account does not enter the auction directly. Google calculates quality fresh for every single query, using real-time signals. The reported score is a rolled-up diagnostic of your expected CTR, ad relevance and landing page experience.
Does that make Quality Score useless? Not at all. It is the only window Google gives you into how those quality components are judged, so in practice it remains the metric you evaluate and optimise against. A keyword sitting at 3/10 is being priced worse than one at 8/10, whatever the real-time machinery does underneath. Branded keywords are the proof: they almost always sit at 10/10 because relevance and expected CTR are near perfect, and their CPCs are priced accordingly.
Ad Rank thresholds: the floor under your CPC
Since 2017, every auction has minimum thresholds your ad must clear to show at all. These act as reserve prices, and they vary by query, device, location and ad position. Two practical consequences follow.
First, having no competition does not mean free clicks. Even if nobody bids below you, you still pay at least the threshold. Second, your actual CPC can come out higher than the classic formula predicts, because the formula only accounts for the competitor below you, not the floor Google sets for that specific auction.
The RGSP revelation
The most significant update to the textbook picture came out of the US antitrust trial in 2023, where Google confirmed that its auction is a Randomised Generalised Second Price auction, or RGSP. Through mechanisms internally called things like squashing, Google can adjust rankings and pricing beyond the pure second-price logic, occasionally swapping positions between bidders at randomised prices to manage overall price levels and long-term auction health.
Trial documents also showed that Google has tuned auction parameters over the years in ways that raised average prices, without advertisers being told. None of this means the formula is wrong as a mental model. It means the tidy maths is an approximation of a system Google actively tunes, and that observed CPCs will not always reconcile perfectly with the theory.
What this means for how you run accounts
The practical playbook has not changed, it has sharpened. Quality remains the biggest lever you directly control: tighter ad groups, ads that match the query, landing pages that deliver on the promise. Every improvement in the quality components lowers the price you pay at every position.
Treat Quality Score as your diagnostic dashboard rather than a number in the pricing equation. Use the three component ratings to find what to fix, and expect the CPC benefit to follow. Fill out your ad assets, since expected asset impact is now a named Ad Rank factor. And accept that in a smart bidding world, your bid is increasingly set by the algorithm, which makes quality the differentiator between paying £4.01 and £3.76 for the same click.
The formula on the whiteboard still deserves its place. Just remember it describes the principle of the auction, not the full machinery behind it.