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Last week, Google announced a change to their AdRank formula pertaining to “top placement” positions (i.e. the banner text spots at the top of the search results page, versus the links down the right side of the page.

Not surprisingly, these premium spots above the organic results receive higher click-thru rates and considerably more traffic — albeit at a higher cost — than the links in on the right column of the page. Many users do not even differentiate between the paid and organic results in these spots and simply associate the “ads on the right” with paid links.

Anyhow, the change, as announced on Google’s Inside Adwords blog, is a bit cryptic and we received little additional information from our reps over at the Googleplex. This has sparked a bit of debate internally at Wpromote about what exactly will be the net result of these changes. Google’s ambiguous explanation:

“The key change to the formula will be how we consider price. Today’s formula considers an ad’s Quality Score and actual cost-per-click (CPC). The improved formula will still heavily weight Quality Score, but instead of actual CPC, it will consider an ad’s maximum CPC.”

Here is what we know. Presently, there is a combination of quality score and your CPC that determines whether or not a particular keyword and ad combination is “banner-worthy” as we call it here. This CPC that you pay is a penny more than the cost that it would take to outrank the next highest advertiser. This is a bit tricky because it is not a pure auction model, so what you pay per click does not relate directly to what the advertiser above or below you is actually paying. It is the bid that must be paid based on your quality score (which is a composite of your keyword’s CTR, the history of your ad, display URL, landing page quality and a myriad of other “relevance” factors). The bottom line though is that if you bid let’s say $1.00 for a keyword it may require an actual cost of $.50 to rank above the next advertiser. The next advertiser may be paying more than you or less due to all of the other relevance factors. So the problem here is that you may not get to show in the banner because it only took $.50 to outrank the advertiser below you, but the formula to qualify to show up in the banner would require a bid of $.75, for example. Google hits on this issue:

“Even if you have a high quality ad, if advertisers below you are not bidding very much, your actual CPC may not be high enough to qualify your ad to appear in a top position.”

So Google’s change will essentially allow more ads to show in the banner by taking into account what your Max CPC is, or what you are *willing* to pay, regardless of what it would take to simply outrank the advertiser below you. Google will not show you what this bid is, but will most likely begin to show more ads in the banner if your Max CPC bid is significantly higher than your actual CPC.

What are the take-aways here? This is under debate right now, but here are my beliefs:

  • Google will ultimately show more ads in the banner. Instead of seeing two ads in the banner, you may see up to 4. Also with niche keywords with only a single advertiser, this is almost always never given “banner-worthiness” and is relegated to the top spot on the right. More ads in the banner combined with higher prices per click means one thing for Google: More revenue. There is no debate of this fact.
  • For advertisers whose ads are already coming up in the banner or who bid lower down on the right side of the page, I do not anticipate seeing much effect.
  • For advertisers who consistently appear not in the banner but high on the right side of the page, I believe that they will potentially see a move of their ad to the banner (generally good thing) but a significant jump in their cost paid per click (bad thing) and a big jump in clicks due to that banner placement. Whether or not this is good or bad depends on if the advertiser will benefit for a higher volume of clicks but at a higher price. Many times, I believe that the answer will be no, but time will tell.

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