Oct 232013

Google's Ad Rank Logic Changes, Ad Extensions and CPC Thresholds for Top Positions

Yesterday, Google announced a change to their Ad Rank logic on the Inside AdWords blog. Historically, Ad Rank was defined by two elements, Quality Score (QS) and Max CPC (Bid). In the newly announced calculation, a third element has been added to the mix, measuring the "expected impact from ad extensions and formats."

Although Google doesn't give an exact date of the change, their announcement notes that there has been "months of testing," so advertisers have likely been seeing the effects of these new calculations for a while now.

A few months back we noted that CPCs on Google for brand terms had been rising at very high rates and offered that the cause was Google starting to normalize QS for the impact that ad extensions were having on click-through rates.  In other words, ad extensions were driving up CTR, which improved QS, which should have lowered CPCs.  By accounting for the impact of extensions, the QS used for Ad Rank is lower, resulting in higher CPCs.

The announcement yesterday gives the impression that ad extensions did not previously impact ranking at all and will now do so.  But, it's probably more accurate to think of it as Google divorcing the impact of extensions from the expected CTR of the main ad, but then adding some of those impacts back into their calculations as a separate consideration.  Unfortunately, it appears the net effect of this change has been to drive up CPCs for ads in top positions, like brand ads, by diminishing the benefits of ad extensions on Ad Rank.

Thinking about this change and reviewing the material around it has revived some of the fundamental questions about the AdWords system.  We noticed that Google recently refreshed an excellent help page that is worth reading regarding Quality Score. Great refresher for all and worth a read.

Tip 6 on the list is very interesting.  Under the heading: Quality is given extra consideration when determining which ads appear in the top spots Google states that "For ads in top positions above Google search results, we use the same Ad Rank formula, based on your bid, the quality of your ad and landing page, and the expected impact of extensions and other ad formats. However, only ads that exceed a certain Ad Rank threshold are eligible to appear in these positions.  The higher the ad quality and the better the expected impact of extensions and other ad formats, the lower the CPC threshold. "

We recalled a post from 2010's RKG Blog regarding this exact concept - special treatment for Google top placement auctions.

We need to spend some more time digesting this, but three key factors appear to be strongly correlated: the brand keyword CPC rise earlier this year, the change in how extensions impact Ad Rank, and top placement CPC thresholds. Put another way, ad extensions are almost exclusively found in top placement auctions. Often, the most prominent ad extensions occur when there is only one advertiser qualifying for the top placement (ie. brand keywords).

Is it possible or even likely that brand keyword CPCs rose primarily from an increase in the thresholds that Google controls?  Taking out the impact of extensions from QS or diminishing their contribution to Ad Rank, should still have left nearly all brand ads in promoted position and having their actual CPCs still being whatever the threshold is.  Since CPCs have gone up sharply, it suggests the threshold has too.

Google has historically justified minimum thresholds for top placements as premium SERP real estate. We highly agree with that argument, and Google has indeed earned that right. However, what is the balance between a minimum CPC threshold for a keyword with ad extensions compared to one without? With minimal transparency here, it is difficult to know.

What does your data show for top placement keywords?


4 Responses to "Google's Ad Rank Logic Changes, Ad Extensions and CPC Thresholds for Top Positions"
Carrie says:
Would you ponder that quality ad copy becomes more important?
Hi Carrie, Quality ad copy is important for generating a good click-through rate, which is still by far the biggest component of quality score, but at a certain point the returns from copy tweaks diminish quickly. For programs that have well-tailored copy and a full complement of ad extensions in place for Google to choose from, I don't see this change as shifting the balance towards copy and away from other optimization efforts. Our argument here is that Google is basically dialing back up their revenues (http://www.rimmkaufman.com/blog/googles-revenue-dials/14022011/) by indirectly raising CPC thresholds for ads in top position. They've couched this change in a lot of language that muddles that fact, but that seems to be the crux of the matter. Historically, RKG has found brand CPCs to run lower on Google than Bing, all else being equal, and brand CPCs on Google are still lower than they were a couple years ago before ad extensions really began skewing the picture. So, we can think of this as more of a correction than a paradigm shift.
Dave says:
Hi Mark, Very interesting write up. Agree its most likely a correction relating to ad extensions i.e. they were undervaluing the CTR impact and resultant improvement this gave to CPC's. Having corrected it, the question is, we're they justified in doing so. In this instance I'd argue yes, because they appear to have been correcting a previous omission in their algo. As an advertiser, if you've been experiencing this, and had no explanation is easy to understand why you might feel that they've simply put up the prices and "done you over". Its a great example of how poor and slow communication can really create a bitter feeling amongst your customers. If I were the CEO at Google (not only would I be living on a beach) but I'd aim to improve the timeliness, quality and transparency of the information I was providing to my advertisers, who after all pay for my cocktails on said beach and a lot more.


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