The Google AdWords Algorithm -- Why Your Ads Rank Where They Do!

Let's Catch Up on the History
We should have started writing this article from the beginning of the Google AdWords Pay Per Click product, since we were here and using it from day one! But, since we did not, we will VERY BRIEFLY cover the original simple algorithm Google used to determine your PPC ad rankings and get you caught up to where we are today -- a complicated, somewhat convoluted, monster of a algorithm Google has designed to "enhance the user experience" (the quote is from Google -- not from us).

Even in its simplest form this explanation is long. So, if you really want to understand, be prepared to pay attention and read closely for a while!

The Original Google AdWords Algorithm
It started out as a very simple and understandable algorithm and represented (what may have only appeared to be) an improvement over the ultra-simple process used by Overture (now Bing) where "your bid determines your position".

The original PPC ranking algorithm took into account only a couple of variables:
1) CTR (Click Through Rate of your keyword), and
2) MAX BID (Your bid for the maximum amount you were willing to pay for a click). Then your ranking score was calculated and compared against other bidders on that keyword to determine where you would rank. This algorithm "rewarded" bidders with good CTRs and/or HIGH BIDS. It even made it possible for a well performing ad to outrank one that had a higher bid but performed poorly. 

[CTR * MAX BID]=Rank Score

The following example explains it best (assume the keyword is widgets):

And, at the simplest level, that's how it worked. Was it Fair and Good? We thought so!  So if it was liked so much, why did it change? Probably because of $$$$$$$$$$!  The algorithm had a VERY LARGE revenue generating hole in it:

The Next Part of the Evolution in the Google AdWords Algorithm -- Beyond CTR * MAX BID
Sorry, but in the second stage the algorithm gets a bit more complicated and simple examples and calculations cannot be provided. Therefore, live with what we can communicate in written form.

If memory serves me correctly, between Oct 2004 and March 2005 the Google algorithm went through several "enhancements" -- All of which were not openly disclosed prior to or after the change -- Only the die-hard PPC analysts managed to detect and gather enough information to estimate what the actual changes were. So, for this phase, we will tell you what happened in a Q & A & R format (that's Question, Answer, Result).

Noticed First in late 2004
Question: Wait a minute.. I'm bidding on keyword [Mexia purple widget] (that's exact match) and my bid is $0.10 -- There is no way anybody else is bidding on this term, so why is my ad ranking never any better that 19th? AND, since nobody else is bidding on that carefully selected exact match keyword, why are all those ads showing ahead of me?

Answer: Google apparently decided that, even though you are the only bidder on a keyword, he would determine the topic your keyword related to and make you compete against other ads in that topic -- ads for topical keywords carrying a MUCH HIGHER MAX BID than you $0.10. 

Result: You could no longer find "cheap" keywords that will drive any significant traffic to your site as a result of top positions in the ad rankings. Google makes more (significantly more) money from your "carefully selected" keyword where you THOUGHT you were the only bidder.

Noticed First in February 2005
Question: Darn... I keep raising my bids, but my ad positions (rankings) refuse to get better. What is the deal here?

Answer: Google changed the algorithm. It changed form [CTR * MAX BID] = Rank Score to something like this (nobody outside the Google engineers knows the real formula): 
[MAX BID * KEYWORD CTR * (AD GROUP CTR or AD COPY AVERAGE CTRS or something to this effect) * POSSIBLE A CAMPAIGN WIDE CTR * POSSIBLY SOME CAMPAIGN or ACCOUNT AGE FACTOR] = RANK SCORE
YES, we know it is AT LEAST this complicated and utilizes these types of variables to determine rankings for ads. And, there is probably a few minor variables in the algorithm we have not yet discovered.

Result: Confusion! Controlling your ad positions just got VERY tough. If you make your BID HIGH ENOUGH, you can improve your position -- but, we are not talking small amounts here. We are talking raising bids of $0.10 to the neighborhood of $1.50.  Plus, controlling or optimizing the CTR of an adgroup and campaign is a great deal harder than the doing the same for a single keyword. And YES... this probably also increased AdWords revenue.

Another Evolutionary Change in the Google AdWords PPC Algorithm
The latest change complicated things even more so try to stay with use here. So, for this phase, we will continue  to describe what happened or changed in a Question, Answer, Result format.

Noticed First in Early July 2005
Question: Wait a minute.. My Google AdWords ad for my keyword has ranked in the top position for over a year and on Monday it's all of a sudden ranking 27th!  I changed nothing and I'm still bidding an outrageous amount, so WHY AM I SEEING MY AD IN 27th position?
Answer: Google added something new to the algorithm called (for lack of an official name) a LOCALIZATION FACTOR. Now the ranking formula looks like this: [ MAX BID * KEYWORD CTR * (AD GROUP CTR or AD COPY AVERAGE CTRS or something to this effect) * POSSIBLE A CAMPAIGN WIDE CTR * POSSIBLY SOME CAMPAIGN OR ACCOUNT AGE FACTOR * (A LOCALIZATION FACTOR APPLIED DEPENDING ON WHERE THE SEARCH ORIGINATED)] = RANK SCORE
Result: Your ads now rank in different in different parts of the country (or world) depending on where the search for your keyword originated! 

More and More Changes in the Google AdWords Algorithm
To simplify, see the most recent ranking formula below.

Now the ranking formula looks like this: [ MAX BID * KEYWORD CTR * (AD GROUP CTR or AD COPY AVERAGE CTRS or something to this effect) * POSSIBLE A CAMPAIGN WIDE CTR * POSSIBLY SOME CAMPAIGN OR ACCOUNT AGE FACTOR * A LOCALIZATION FACTOR * LANDING PAGE QUALITY ] = RANK SCORE

So, Given this Information, What are the Obvious Recommendations

• Get Professional Help: If you are not willing to read, study, research and keep up with Google changes -- DON'T MANAGE PPC CAMPAIGNS YOURSELF... FIND A PPC PROFESSIONAL YOU CAN AFFORD AND GET HELP.

• Don't Expect to be Successful Without an Adequate Budget: Cheap keywords and bids are a thing of the past! ALL keywords have now become popular keywords in terms of cost and traffic generation potential. 
  You will have to have a reasonable budget for your PPC campaigns. Bids for popular terms are HIGH and Google does not care if your company has 3 people or 3000 people -- if you want the exposure you get from good ad positioning, PAY FOR IT!

• Give it Your Best Shot and WATCH YOUR ROI Closely: PPC advertising can do wonders for the sales of a business. BUT, there is more to it than that --  the ROI (or sometimes referred to as return on advertising) MUST BE PROFITABLE. 
  So, try it and don't be afraid to walk away if it's not profitable enough. Watching your ROI is also an excellent way to measure the effectiveness of your "PPC professional help".

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