Heads up: Google is changing how they compute Quality Score.
We got a powerpoint from our helpful G reps about this on Friday. That deck has essentially the same content as their blog posting on this (see Inside Adwords, 8/21/08, Quality Score improvements).
In a nutshell:
QS is no longer keyword static, but rather will vary by user query, geotargeting, etc.
"Inactive for search" distinction goes away -- every non-paused ad has the theoretical chance to be served, even if in practice low-QS low-bid ads never will
"Min bid" metric replaced by "'First page bid" metric
The first point should really help advertisers, a good thing. The second point doesn't matter much. That third point is most interesting. To quote Google:
We're replacing minimum bids with a new, more meaningful metric: first page bids. First page bids are an estimate of the bid it would take for your ad to reach the first page of search results on Google web search. They're based on the exact match version of the keyword, the ad's Quality Score, and current advertiser competition on that keyword. Based on your feedback, we learned that knowing your minimum bid wasn't always helpful in getting the ad placement you wanted, so we hope that first page bids will give you better guidance on how to achieve your advertising goals.
While many advertisers will indeed find first-page-bid (FPB) guidance more helpful than min-bid guidance, FPB also encourages positional bidding.
For all keywords with more advertisers desiring page 1 than there are page 1 slots available, FPB incites escalating bid wars.
Good for Google shareholders, tougher for Google advertisers.
Not a huge impact, I predict, as major advertisers competing on high-cost high-volume "head" keywords have an intuitive sense of the bid landscape, and have a sense of the approximate cost of various ranges on the page. But increasing emphasis on B2P will likely drive modest increases on prices for "tail" term clicks, as legions of smaller advertisers turn to FPB for guidance.
Focusing too much on your competitors leads to irrational bidding. As PPC advertisers, we can't assume our competitors have the same goals or economics as we do. In many keyword verticals, we can't even assume our competitors are bidding rationally. Blindly following competitors' bids can lead you off the cliff.
Advertisers face a choice:
Bid-to-position, letting the economics shake out as they will ("Golly, staying on page one is darn costly, and we're losing money there"), or
Bid-to-economics, and let the positions shake out as they will ("We don't want to lose money on keyword "X" and so we simply can't afford page one.")
I'll let you in on a competitive secret. At RKG, we almost always follow the bid-to-economics approach. Why? Because doing so generates greater profits for our clients.