Changes to Google's Top Rank Formula, Part 1

Google recently modified its AdWords formula. You may see an impact if you do one of the following: mine the keyword tail; operate in the geographical U.S. with keywords not purchased by national aggregators; or participate in international PPC (define) search, particularly in countries where the keyword bidding marketplace is a bit less mature.

You're particularly likely to be affected if the following elements exist simultaneously:

You operate in an immature marketplace.

You mine the long search tail.

You run high quality, relevant ads.

Your bid prices are significantly higher than your current billed CPC (define).

The reason you're more likely to be affected with the above scenario relates to how Google has managed to have its cake and eat it too. But I'm getting ahead of myself.

It isn't unusual for major announcements to occur during Search Engine Strategies (SES), particularly in San Jose or New York. But this year, Google did something a little different. When the engine makes material changes to the AdRank algorithm used to determine ad placements on its SERP (define), it generally gives the industry advanced warning. But instead of announcing the impending change at SES, Google announced it on its blog, "Inside AdWords" on August 8. Yet, it timed the change to occur on August 22, during SES San Jose.

The change is to the formula used to calculate whether Google gives the advertiser (and specifically, the ad) top placement. Top slots are defined as the slots above the organic results, as opposed to ads shown down the right rail.

There was a lot of discussion in the blogosphere and during SES sessions about the top placement formula and Google's Quality Score. Not everything reported is correct. I had an opportunity to chat with both Nick Fox, Google's senior product manager for ad quality, and Clay Bavor, product manager for ad quality, for accurate information.

The AdRank formula used to calculate rank (ad order) hasn't changed. The rank order will continue to be computed by multiplying Quality Score by CPC. The autodiscounter, which automatically causes you to pay just enough to have your AdRank exceed that of the ad below you, is also still in effect.

What changed is the formula Google uses to decide whether to show your ad in the top portion of the page or leave it in the right rail. Quality Score continues to be the greatest determining factor in top ad placement. This is consistent with Google's focus on relevance. Google will never compromise SERP quality to make an extra buck. Several bloggers and reporters misinterpreted the change in formula as a sellout. However, Google's extremely good at figuring out ways to make more money while meeting searchers' needs. That's where the new formula comes in.

To have an ad considered for top placement, you need a minimum Quality Score. (I'll cover the intricacies and misconceptions surrounding Quality Score in a future column.) The easiest way to think of Quality Score is as predicted CTR (define) normalized to eliminate position influence. Quality Score is calculated based on Google-only data (for the purposes of determining ad placement). Assuming you have a sufficiently high Quality Score, the new formula uses a combination of maximum bid and Quality Score to determine eligibility subject to a new minimum price for top placement set by Google.

This allows Google to decide, on a keyword-by-keyword and SERP-by-SERP basis, how much it wants to earn for the top spots. The minimum bid price for top positions is undisclosed and subject to change.

Most SERPs and keywords already have a high enough clearing price for clicks for the upper positions to exceed the top-slot minimum. In such a case, no change in position, placement, or billed CPC occurs. That's because the auction pressure of the overall bid landscape has pushed the billed CPCs fairly high. In an immature market, if you bid high enough (above the minimum) and have a high Quality Score, Google will assume you want the top slot and move you there, simultaneously charging you the top-slot CPC minimum, even if it's higher than you would have paid to remain in the right rail using the autodiscounted CPC based on the advertiser below you. This could be a significant jump if your bid was high.

Next time: more on the new minimum bid price and working it to your advantage.

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