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In their endless pursuit of relevant advertising, Google has made many changes to the way in which they serve ads. Many of these changes have gone against surface level laws of profitability. Things like, excluding advertisers for being irrelevant, making one advertiser pay more for the same ad space another advertiser is paying less for etc.

In the end, what Google has done is created a new way to think about advertising. Google has shown us that advertising can add value to an experience--it can even be part of the experience.

Today Google announced some changes to the way in which they price ads. These changes have some wondering whether Google is continuing their quest for the ultimate in relevant advertising, or gearing up for the continued economic slowdown.

The two major changes are:

More precise Quality Score calculation

Higher quality ads above the search results

The Google Adwords Blog and Techcrunch each do a pretty good job of explaining the intricacies of these new factors. For the sake of ease, I will copy how Google defines each:

More precise Quality Score calculation
Clickthrough rate (CTR) is the most significant component of Quality Score because it directly indicates which ads are most relevant to our searchers. As you probably have observed, ads in high positions typically earn better CTR than those in low positions, because ads in high positions are more visible to searchers. To calculate the most accurate Quality Scores, it's important that the influence of ad position on CTR be taken into account and removed from the Quality Score.

In the coming days, we'll update the portion of the Quality Score algorithm that accounts for ad position. This will result in more accurate Quality Scores, ensure that ads compete fairly for position based on their quality and bid, and enable Google to show the most relevant ads to searchers by rewarding high-quality advertisers with better ad positions.

This first change makes sense, but I am wondering; if an advertiser gets rewarded for being highly relevant, gets good ad placement, and then speaks to a consumer's needs when serving an ad, should they not be exponentially rewarded for that? It seems the advertisers that continuously adheres to Google's best practices, and continually achieve a lower minimum bid for higher ad positioning, should continue to be rewarded (at a higher rate than others). By discrediting an advertisers ability to get to the top and continue to reward them for good CTR, Google may piss off some advertisers. On the flip side, this virtuous circle that an advertiser can enter into may block out other relevant advertisers, costing Google money

Change #2

Higher quality ads above the search results
We're also improving the way we determine which ads show in the yellow region above the search results. These positions are particularly valuable to advertisers because they are prominently positioned on the page. Given their prominence, it's especially important that these ads be high quality; we therefore place extra emphasis on quality when determining which ads to show in this location.

To appear above the search results, ads must meet a certain quality threshold. In the past, if the ad with the highest Ad Rank did not meet the quality threshold, we may not have shown any ads above the search results. With this update, we'll allow an ad that meets the quality threshold to appear above the search results even if it has to jump over other ads to do so. For instance, suppose the ad in position 1 on the right side of the page doesn't have a high enough Quality Score to appear above the search results, but the ad in position 2 does. It's now possible for the number 2 ad to jump over the number 1 ad and appear above the search results. This change ensures that quality plays an even more important role in determining the ads that show in those prominent positions.

Keep in mind that these enhancements may cause changes to your ad position, spend, and performance. We're launching these updates soon so that you'll have enough time to review your accounts and prepare for your holiday season advertising. While we don't believe that any immediate changes are needed on your part, we encourage you, as always, to watch your key metrics and to make adjustments as appropriate.

The strategy behind this one is a bit more confusing. It is obvious that Google wants someone in the top spot at all times because, that is the most coveted piece of real estate on the page. This post talks about the need to meet a certain "quality threshold" (odd that they are using language other than "quality score"). The post goes on to say:

if the ad with the highest Ad Rank did not meet the quality threshold, we may not have shown any ads above the search results. With this update, we'll allow an ad that meets the quality threshold to appear above the search results

For those of you that do not know it, here is the formula for Ad Rank:

Ad Rank = CPC bid × Quality Score

The language above can be interpreted as follows:

If you are bidding more, thus fulfilling one variable of the Ad Rank score, and are receiving a higher Ad Rank, you can potentially meet the quality threshold (not quality score) and get bumped to the top over another advertiser who is bidding less. Granted, your quality score has to be good, but it seems they are saying that, in the past, good was not good enough; and now it is.This is a tough one. On the surface level it is presented as being all about quality, but I am not so sure about that.

I realize that their is some ambiguity here, but I feel my interpretation of this language is fair--as the Google post is very vague in my opinion. I am thinking long and hard about what this means (I am even thinking, I am over thinking this) but I do believe Google has a board to answer to, and they are in no position to improve quality at the expense of their bottom line.

I am awaiting, and welcome people to come and tell me I am wrong. Do me a favor though, if you are going to do so, please be as descriptive as possible--thanks!