In the upcoming weeks, Google will be releasing an updated algorithm to determine the ads that are displayed in the top ad spot, above the organic search results.
The updated algorithm will continue to use the quality and cost-per-click (CPC) figure but will be slightly tweaked for that top ad position. Instead of using the actual CPC, Google will use the advertiser’s maximum CPC in the overall equation. In addition, Google will be applying a stricter threshold on the quality component for the top ad positions.
Nick Fox, Product Manager of Ad Quality at Google, told me that this will help produce better quality ads in the top ad position because they are adding that stricter threshold for those ads. Plus, this will give advertisers more control over obtaining a top ad spot.
Let’s take a step back and break this out in a bit more detail.
One of the most common questions I hear in discussion forums are how does one obtain the top Google ad position. So to clarify, the top ad position is highlighted in the image below.
Google uses a quality score plus CPC model to rank all their ads. In the past, to achieve a top slotted ad position, you would need to meet a certain overall threshold in both quality and CPC price. Google, as stated above, is changing that algorithm to be more sensitive of the quality component, while also adjusting the figure used to determine your CPC. Now, Google uses the “actual” CPC, but in the upcoming weeks Google will use the “maximum” CPC.
What is the difference between actual CPC and maximum CPC? Every advertiser has to set a maximum CPC for their keywords. But an advertiser won’t necessarily pay the maximum CPC price when their ad is clicked on. In fact, most of the time advertisers won’t pay that amount. Instead, they will pay an actual CPC, which is lower than their maximum CPC.
For example, say I have an ad with a maximum CPC of $0.50, but there are no competitors in my keyword ad space. In that case, I will probably pay an actual CPC of $0.05 and not the $0.50, since I’m not competing against anyone.
In the past, Google used the actual CPC in the ranking algorithm for the top ad position. In the future, Google will be using that maximum CPC. As you can see, this gives advertiser more control on achieving that top ad position. Back to our example above. This advertiser who has been noticing a $0.05 actual CPC, will now be credited for his maximum CPC of $0.50 and will thus have an easier chance at obtaining the top ad spot.
Can advertisers abuse this? Possibly, but with the stricter quality threshold, it will be less likely. It is important to note that Google said while the current algorithm weighs both quality and CPC somewhat equally, the new algorithm for the top ad position will weigh quality substantially more heavily then they have in the past [NOTE: Google has followed up now to say that quality is weighted more heavily now and in the new system, the combined threshold of quality and CPC will be higher. We're double-checking further on this]. Google is implementing this new algorithm change so that those top ads will have a higher quality, so I suspect their tests proved to yield a high quality outcome.
So who will be impacted by this change? Well, right off the bat, those who have top ad positions for their ads will see a lot more competition in those areas. However, Nick Fox told me that there will be a “relatively limited” number of advertisers impacted by this change.
Again, there is no specific date as to when this new algorithm change will go live. It is expected to happen within the next “few weeks.” Google is letting us know now so that we have time to prepare for the change.
- Better quality ads in the top ad position for searchers
- More control for advertisers over their ads achieving the top ad position
- Moving from using “actual” CPC to “maximum” CPC
- Placing a stricter threshold on quality of those ads
Postscript: I have further clarification from Google saying that in the current formula for ranking, they weigh both CPC and quality equally. They also added that for the current promotion formula, quality is rated more heavily, and that’s not changing.
Postscript 2: To clarify, you will not be billed the maximum CPC for those top ads. You will still be charged the “actual” CPC. Google sent me this additional information about this concern:
Your actual CPC will continue to be determined by the auction, but subject to a minimum price for top spots. The minimum price is based on the quality of your ad and is the minimum amount required for your ad to achieve top placement above Google search results. As always, the higher your ad’s quality, the less you will pay. And you will never be charged more than your maximum CPC bid.