Changes to Google’s Top Rank Formula, Part 2

Google is taking control of its auction marketplace by setting minimum prices for top ad positions, subject to a similar minimum Quality Score. This change could affect your search campaign now and in the future, as the search engine continues to toy with its top-rank formula. Part one of this series discussed how a large maximum bid in an immature marketplace could trigger surprises in billed CPC (define), as well as shift the ad into top position. If you can help it, don’t bid high if you aren’t willing to pay (a good rule, regardless).

More sophisticated bidding and campaign management platforms can be configured to keep bid prices close to the billed CPC and avoid volatility. If you’ve seen an impact from the formula change and aren’t willing to pay for top placement, lower your bid. Based on my understanding of the system, your ad will move back to the right rail.

When I asked Google for clarification on the impact of the minimum price, I received the following response. While long, it’s instructive:

As you noted, the actual CPC you pay for an ad in a top spot will continue to be determined by the auction, but subject to a minimum price. So long as your ad meets our stringent quality threshold and its bid meets the minimum amount required to achieve top placement above Google search results in the given auction, your ad will be eligible to appear in a top spot. However, as always, the higher your ad’s quality, the less you will pay.

Specifically regarding your question about how the discounter works, if an ad that was shown previously in a right-hand-side position is now shown in a top position, the discounter will only charge the minimum amount needed to attain that position. It is possible that the minimum price to attain a top position is higher than the price before the formula change, particularly if an advertiser’s bid is significantly higher than his average CPC. We advise advertisers who would prefer to remain in right-hand-side positions to review their accounts and ensure that their maximum CPCs are set to appropriate amounts based on their specific ROI.

The implementation of a minimum price gives advertisers with high-quality ads more control over the likelihood of achieving a top spot.

Key is the minimum top-slot prices Google set during the first days following the formula change may not be the same ones it uses in the future. This means Google has one more lever to pull that can drive incremental revenue due to you, the marketer who spends more. Google can test keyword price elasticity at any point in time. Were I pulling the levers at Google, I’d have a hard time resisting the temptation to raise the top-slot minimum during Q4, when CTRs (define) and Quality Scores will rise along with conversion rates, meaning marketers’ willingness to pay may also rise. If Google’s dissatisfied with auction pressure in a market and thinks top spenders have an extra willingness to pay, it now has an easy way to ratchet up bids for top slots.

An analogy is a commodity market, also auction-driven real-time markets. If pork bellies normally trade between $90 and $100, and the minimum price were set by the exchange at $80, it would have no impact on the trades. However, if the exchange set a new minimum for the juiciest bellies (top placement) at $95, some of the trades would be affected.

In Other Google News

On another note, Google announced last week that its CFO George Reyes is retiring. Reyes leaves big shoes to fill, because he truly understood the key drivers of traffic monetization and how these drivers include not only supply and demand but also relevance and continued user loyalty.

Most CFOs would kill for Reyes’ job with a company with high profit margins, billions in cash flow, and thousands of smart employees. But it isn’t all upside. Whoever takes the Google CFO job will have the difficult task of helping the executive team decide where to invest in new businesses. Pure search revenue isn’t growing the way it used to, and some of the businesses Google wants to get into are highly expensive and experimental. Google needs more blockbusters like search. Investing in the blockbusters without blowing billions on unsuccessful ventures won’t be easy.

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