New AdWords Ad Ranking Formula: What Does It Mean?

AdRank in AdWords is a key AdWords marketing concept that plays a huge role in determining how prominently your ads are displayed in a SERP and also your cost-per-click. So, when Google quietly announces huge changes on how AdRank is being calculated, you should definitely pay attention!

In my column today, I'll explain in detail what AdRank is - and everything you need to know about the algorithm change!

How Are Google Ads Ranked On A SERP?

AdRank determines the order in which competing ads should be ranked on a SERP, which (obviously) has a huge impact on the visibility of your ads to potential customers. Here's the basic concept:

AdRank in AdWords has historically been calculated based on your Max CPC and Quality Score

The preceding figure illustrates how competing ads on Google are ranked in descending order of Ad Rank. The advertiser that has the highest product of maximum CPC bid and Quality Score wins the coveted top ad spot.

How Does AdRank Impact Cost-Per-Click?

A less known (and more confusing) fact about AdRank is that it plays a huge role in determining the actual cost-per-click that your competitors pay when someone clicks on their ads, as you can see by the following figure:

The CPC You Pay is Determined by the Ad Rank of the Person Below You Divided by Your Quality Score (Figure Courtesy of WordStream)

Note that the cost-per-click you get charged by Google when someone clicks on your ad (which is not the same thing as your maximum CPC bid - which is the most you are willing to pay, but not necessarily what you are actually charged) has everything to do with what other people were willing to pay for the click and their Quality Score, divided by your Quality Score, plus 1 cent.

Confusing huh? Let's go through a quick sample ad auction example here:

An Example Ad Auction in AdWords where 4 Advertisers are competing for the same Keyword (Figure Courtesy of WordStream, Inc.).

In this example, four advertisers are competing for the same keyword. Notice if someone were to click on advertiser 1's ad, he would pay just $1.61 which is equal to the Ad Rank he must beat (which is Advertiser 2's Ad Rank of 16) divided by his own Quality Score (which is 10), plus 1 penny.

The key takeaway here is that AdRank helps determines both your ad position and the cost-per-click of your nearest competitor. For that reason, I consider it to be among in holy grail of SEM metrics, right up there with other super important PPC metrics like Quality Score, (etc.).

What's Changed With AdRank?

Last week, Google announced big changes to the way AdRank is calculated. Unfortunately, In typical Google fashion, the announcement is rather short and vague on details - so here's my detailed, line-by-line analysis of the official announcement that was posted on official the AdWords Blog (complete with my snarky comments inline).

Official AdWords Blog: "AdRank Improvements: Our system for ordering ads on search results pages uses a calculation called Ad Rank. Previously, Ad Rank was calculated using your max CPC bid and your Quality Score. With this update, Ad Rank will also take into account a third component: the expected impact from your ad extensions and formats. In addition, we've increased the importance of Ad Rank in determining whether your ad is eligible to be displayed with extensions and formats."

Translation: We really want our advertisers to adopt ad extensions so that the sponsored ads on the SERP look even more blinged-up than ever. Unfortunately, you advertisers are a bunch of lazy bums and adoption is painfully slow. So, going forward, instead of just rewarding advertisers that use of Ad Extensions, we're also going to also start penalizing advertisers who fail to adopt them.

Official AdWords Blog: "Here are some more details and implications of these changes: Ad extensions and formats can now influence the position of your ad on the search results page. If two competing ads have the same bid and quality, then the ad with the more positive expected impact from extensions will generally appear in a higher position than the other."

Translation: We warn you lazy advertisers, you better start using ad extensions or else!

Official AdWords Blog: "When estimating the expected impact of extensions and ad formats, we consider such factors as the relevance, clickthrough rates, and the prominence of the extensions or formats on the search results page."

Translation: AdRank has always been a mystery to SEMs, and now we're going to make it even more confusing and ambiguous. <evil laughter>

Official AdWords Blog: "Because Ad Rank is now more important in determining whether your ad is shown with extensions and formats, you might need to increase your Quality Score, bid, or both for extensions and formats to appear."

Translation: Improve your click-through-rates or pay up!

Official AdWords Blog: "In each auction, we'll generally show your highest performing and most useful combination of extensions and formats among those eligible. So there's no need to try to guess which extensions will help improve your clickthrough rate the most."

Translation: Just use all of the extensions, and Dr. Google will determine what's best for your account. <more evil laughter>

Official AdWords Blog: "You may see lower or higher average CPCs in your account. You may see lower CPCs if your extensions and formats are highly relevant, and we expect a large positive performance impact relative to other competitors in the auction. In other cases, you may see higher CPCs because of an improvement in ad position or increased competition from other ads with a high expected impact from formats."

Translation: Adding ad extensions will raise your Click-Through-Rate and Quality Score, which reduces your CPC. However, remember that the formula for the actual CPC you pay is based on the AdRank of your competitors, so if your competitor leverages ad extensions and gets a higher ad rank as a result, then your CPC will go up and your ad position will go down.

Official AdWords Blog: "For now, this update only affects search ads appearing on Google Search."

Translation: Instead of briefing you on this huge change and giving you time to upgrade your ads, we've decided to put the new changes in place starting today! <evil laughter>

What Does It All Mean?

To summarize, below are a few key takeaways relating to the change in the AdWords ad rank formula.

  • AdWords Just Got A Lot More Competitive: If you use Ad Extensions, your ad positions will improve, your CPC will go down, and your competitors CPCs will go up. Conversely, if your competitors use Ad Extensions and if you fail to use them, then your ad positions will drop, your CPCs will go up, and your competitors CPCs will go down.
  • Ad Extensions No Longer Optional: As a direct result of the increased competitive factors, you should really be leveraging every relevant ad extension possible in your ads, now more than ever.
  • Average CPCs Should Go Up: As more and more advertisers get bullied into adopting ad extensions, this should provide upwards pressure on average CPCs since higher Ad Ranks means higher CPCs for your competitors.
  • Advertiser Adoption Of Ad Extensions Should Accelerate: Adoption of ad extensions has been extremely sluggishly. For example, despite the forced migration to Enhanced Campaigns, I estimate that as of today, only 1 in 20 small and medium sized businesses use a click to call ad extension. This should pick up a bit now that Google is cracking the whip.
  • Small Businesses Are The Losers: Small and medium sized businesses are less sophisticated than large advertisers at baseline, and are the losers here since they're far less likely to be leveraging all the latest and greatest ad extensions, especially with new ad extensions being added every month.
  • SEO Loses Again: In the near future, when every ad has one or more ad extensions, it will mean that the space occupied by paid ads will be even bigger than it is now, which means the SERPS will be even more crowded out with blinged-up super-sized ads, further pushing organic results blow the fold for most keyword searches with commercial intent.

Originally published here.

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