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.
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.
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).
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.
Translation: We warn you lazy advertisers, you better start using ad extensions or else!
Translation: AdRank has always been a mystery to SEMs, and now we’re going to make it even more confusing and ambiguous. <evil laughter>
Translation: Improve your click-through-rates or pay up!
Translation: Just use all of the extensions, and Dr. Google will determine what’s best for your account. <more evil laughter>
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.
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.
What are your thoughts about the change in AdRank on AdWords? Let me know your thoughts and reactions the comments below.
Figures Courtesy of WordStream, Inc. — Image Courtesy of Yosemitebear62 Double Rainbow.
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