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How Advertisements Are Ranked

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The PPC ad-ranking methodology has evolved greatly since the introduction of the paid advertising model. Before we describe how PPC ads are ranked today, let’s quickly review the industry evolution:

  • In June 1998, the first major sponsored search service—Overture—was launched. A number of other smaller sponsored search services launched around this time, but none of them were as large as Overture.
  • Google AdWords was launched in October 2000.
  • Yahoo! acquired Overture in 2003.
  • Google introduced its Quality Score measurement system in August 2005.
  • Until the beginning of 2006, all of the sponsored links on MSN Search were supplied by Yahoo!/Overture. In June 2006, Microsoft severed ties with Yahoo! and created its own ad-serving platform. In 2009, MSN Search evolved into the recently launched Bing search engine.

Of course, numerous other acquisitions and products were launched during this time frame, but these are the major PPC milestones.

Auction Model

Each of the large-scale search engines established an auction model in order to rank advertisements. In this auction system, an advertiser would place a bid on each individual keyword. This bid told the search engine how much each advertiser was willing to pay for a click on each keyword. For example, if an advertiser’s bid for the term gourmet coffee was $1, this indicated that they were willing to pay up to $1 for a click on this keyword.

Advertisers entered into an auction for each keyword. The advertiser who was willing to pay the most for each click won the auction, and the rest of the bids fell into the descending spots on the page. This method was known as bid-to-placement, because you could see all of your competitors’ bids for each keyword, and they could see yours. For example, you would have seen a screen that looked like Table 2.1.

Table 2.1 How Bid-to-Placement Information Was Originally Displayed in a PPC Management Interface

PPC Management Interface

Here you could see how much each advertiser was willing to pay in each position. If you wanted to be ranked first, you would adjust your keyword bid to $1.11 or higher. You would then have the number-one ad position—that is, until your competitor bid $1.12. The reasons why this system didn’t work are numerous, but here are the major ones:

Bidding wars: In the preceding example, you can see how easy it was to get into a bidding war. It was almost as if you were at Christie’s auction house and had a little paddle with a number on it that you kept raising in order to keep an edge over your competition. Maybe you didn’t always want the painting that you were bidding on, and you couldn’t afford the price you just committed to, but you sure didn’t want your competitor to get it either. As a result, advertisers were often playing defense against their competitors (by trying to keep them out of the top spots), while they should have been playing offense by trying to attract qualified traffic to their websites.

This old auction system was seriously flawed, because during these bidding wars it was easy to drive up your competitor’s cost per click (CPC). In Table 2.1, you can see that the top advertiser was willing to bid $1.10. This didn’t mean that they would pay this amount; it just meant that they were willing to pay this amount. In actuality, advertisers paid one cent more than the bid below them. In this example, Advertiser 1 was willing to pay $1.10, but they were actually going to pay only one cent more than Advertiser 2, which was $0.97 per click.

To drive up a competitor’s cost, an advertiser would bid one cent under their closest competitor. In Table 2.1, Advertiser 2 could be fine with being ranked in the second position, but they could raise their bid to $1.09 in order make their competitor pay the maximum CPC for that keyword. This happened all the time.

Sure, even today there are keywords in almost any sector that remain highly competitive and require aggressive bids in order to rank well. However, with the quality- based ranking method (which we cover in just a few pages), bidding wars are a thing of the past (for the most part).

Poor-quality ads: With the old bid-to-placement method, the quality of an advertiser’s PPC ad copy and landing page were not taken into consideration by the search engine. The ad-ranking algorithm focused solely on bid prices. If that advertiser was willing to pay for those clicks, the search was willing to take their money.

Uphill battle for new advertisers: It could be extremely difficult for new advertisers to enter an auction. If a new advertiser wanted their ad to appear for a keyword for which a bidding war was taking place, that advertiser would have
to pay these escalated costs in order to get ranked. Also, new advertisers were learning the system, so it was easy to spend a great deal of money without getting good results.

Big budgets vs. little budgets: Not only did new advertisers face an uphill battle in entering an auction; they had a difficult time remaining competitive. Corporations that had very large budgets could set their keyword bids so high that an advertiser with a smaller budget could never compete.

Focus on the wrong PPC tactics: Your keyword bid is just one element of generating an awesome return on investment (ROI) from your PPC campaign. Advertisers need to determine what CPC best garners the ROI, but to achieve the best results, advertisers should be focusing on improving their PPC ad texts, and optimizing their landing pages, contact form, and purchasing process on their website. In the old auction system, optimization wasn’t always the core concern.

Search engine companies were hurting themselves with this auction model, which is why they changed it. They were hurting themselves in the sense that advertisers were not helping the search engines provide relevant results and a great user experience.

Also, advertisers were getting burned pretty easily. If you burn someone enough times, they’re not going to do business with you anymore. With this bid-to-placement system, users were often being served low-quality advertisements, and advertisers were suffering because their costs could be high and the results would vary.

As you can see, this auction system could be very aggressive. PPC advertising is still driven by an auction system, and the amount an advertiser is willing to pay for each click determines their ad position, but your keyword bid is only part of what helps you achieve good rankings and great results.

Today’s PPC auction models take both keyword bid price and ad quality into account. There are minimum bid requirements to make your keywords qualify to enter the auction. There are also minimum quality requirements for your ads and keywords in combination to make them eligible for the auction. If your keywords are completely
irrelevant to your ads and your website, they will not be eligible for the auction and won’t appear in the SERPs. When your keywords and ads do qualify to participate in the auction, their quality scores and bid prices determine how they will be ranked. Bid price is still very important for achieving the best ad positions, but if you present highquality
ads that receive a positive response from users, you’ll be able to rank highly while paying less per click.

Keyword Bids

In the world of PPC today, you can’t see your competitor’s bids, and they can’t see yours. Your keyword bid along with your quality score (which we discuss next) now determines your ad position and how much you will pay per click. Think of it this way: The old system was like a game of tennis, where you were competing directly with your opponent; the current system is more like golf, where the best way to beat your competition is to make your own game better.

For your keyword to be eligible for first-page placement, your bid must meet a minimum requirement. A real-time auction occurs for every search query entered into the search engine. If your bid is too low, your ads will not be considered for that auction. After you’ve met the minimum bid requirement, the search engine evaluates each
advertiser’s keyword, ads, and quality score to determine which ads will be displayed and in what order they will appear. The search engine then determines how much each advertiser will pay per click for this particular search query. Remember, this evaluation process occurs for every query entered into the search engine.

Even though the auction system has evolved (for the better!) over time, advertisers still pay on a per-click basis. That is why it’s still called pay-per-click advertising! Your CPC will have a major impact on your ROI.

In the next section, we discuss how ad quality is determined by search engines and how this system affects you.  In Google AdWords, there are also cost-perthousand- impressions (CPM) and cost-per-acquisition (CPA) bidding options. We don’t recommend using CPM bidding, because CPC bidding allows you to pay a much lower amount per impression.

Quality Measurement

When relevant, high-quality advertisements regularly appear within the SERPs, users will learn to trust and value them and be more likely to click on them. When more users trust ads and click on them, the search engines make more money. Because they make money on ads that users trust, search engines continually refine their quality control to offer even better, more-relevant ads that users will trust even more and click even more often. And this cycle goes on and on.

The search engines have full control over what information is displayed in their organic and paid listings. With organic listings, the search engines find and index websites that will be displayed on a SERP. For the PPC side of things, it’s up to the advertiser to build a PPC campaign with a foundation of targeted keywords, unique advertisements, and relevant landing pages. Basically, you’re bringing your best game to the search engine.

All of the major search engines have implemented quality-based algorithms to evaluate the relevancy of each advertiser’s PPC campaign. Each search engine has its own method of evaluating PPC accounts: Yahoo! calls theirs the Quality Index; Google’s is called the Google AdWords Quality Score; Microsoft adCenter doesn’t have an official name for their quality-based evaluation. Even though these quality-control methods have different names, have varied evaluation methodology, and are reported in different ways, the desired results are essentially the same: to review and score every
advertiser’s PPC account in order to display the ads with the highest scores (in other words, the highest relevancy).

Going forward, we’ll refer to all quality algorithms, regardless of the search engine, as a quality score. A quality score affects a number of critical elements of your PPC performance, including the following:

  • Whether your ad will show at all
  • Where you ad will be ranked on the SERP
  • What your minimum first-page bid will be
  • Your CPC

As mentioned in the previous section, your quality score and bid will determine your ad rank. Figure 2.3 shows the ad rank formula, as used by Google.

The Google ad rank formula

How is a quality score calculated? Most search engines keep their quality-ranking formula a secret so no one can game the system. However, Google has been most forthcoming about the factors that influence their quality score, so we will focus our attention on them (and Google does have the lion’s share of search volume). Here is a list of the major elements that influence your Google AdWords Quality Score:

Historical CTR: A click-through occurs when someone sees your ad and clicks through to your landing page. This is the most important element of the Google AdWords Quality Score calculation. Because Google wants to provide highquality
ads, the CTR is a fair indicator of whether users find an ad relevant to a search query.

Account performance history: Google monitors the performance of an entire account over its lifetime. If a certain PPC account consistently has good quality scores for its keywords, this indicates that the account is trustworthy.

Relevance of keywords to the ads in an ad group: We discuss account structure later in the book, but it’s safe to say that if your keyword doesn’t appear in your PPC ad, Google will not find it relevant. And the users may not either.

Relevance of keywords and the ad to the search query: A great user experience is ensured when there is a logical path from search query to advertisement to landing page. Google awards a higher quality score when the keywords and ad texts within an ad group are closely related to each other.

Historical CtR of the display URLs in an ad group: The display URL is the website address that is displayed in your PPC ad. Google also considers the historical performance of each display URL within a keyword group.

Landing page quality: Google has said that landing pages do not factor into the ad rank formula, but they do contribute to the overall quality score. Improper coding, slow load times, missing privacy policies, and other undetermined factors
can lower your quality score.

These are the most important factors of the Google AdWords Quality Score. There are probably other triggers that Google hasn’t shared with the world, but this list should be enough to keep your optimization docket full! The other search engines have not been as forthcoming with regard to what factors into their quality initiatives, but if you optimize your Yahoo! and Microsoft adCenter accounts similarly to your Google account, you’ll be well on your way to high quality scores across the board.


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