Earlier this month, Google’s Chief Economist Hal Varian put forth some very succinct findings on his AdWords auction research.  In short: Ad Position doesn’t affect conversion rates on Google AdWords.

Then why does Ad Position matter?

The simple answer is, as Varian acknowledges, is that when ads show higher up on the page, they generally garner more clicks, which theoretically leads to more conversions.

Digging beneath this surface-level insight, however, we observe several other meaningful implications.

1) It is well-known that the clickthrough rate (CTR) impacts Quality Score on Google AdWords.  The historical CTR of each keyword/ad combination, as well as CTR of all individual keywords, ads and display URLs, factor heavily into this score — which interacts profoundly with bid settings to determine how much the advertiser will spend.

In other words, maintaining a strong CTR program-wide is one way to mitigate costs and economize a pay-per-click (PPC) advertising program for the long term.

2) An ad showing high on the search results page will often be perceived more favorably than another lower-placed ad.  In 2008, iProspect conducted its Blended Search Results Study and found that 39% of search engine users perceive the companies showing ads among the top search results as the leaders in their field.  This figure has also shown a noticeable upward trend over the years.

So not only are we talking about budget management — we’re talking about brand perception in search engines.

What does Ad Position reflect in the AdWords auction?

Ad Position does not directly correlate with keyword bids or effective CPC (cost per click); this is a fundamental principle of Google’s quality-based auction system (see this video of Varian’s introduction to the AdWords auction).  However, by no means does this a direct inverse correlation — just because the spend level doesn’t directly affect ad position, we can’t say it has no impact at all.

How should Ad Position figure into PPC optimization strategy?

Where are we going with this?  Let’s start with some “ifs”:

IF we acknowledge that ads showing lower on the page will rack up lower costs,
IF we have some tolerance for lower CTR, and
IF we have other branding measures in place (ideally from display advertising or social media)

…then what we should be doing is placing all of our keywords into one of three categories, based on historical PPC data indicating keyword-level ROI:

1 = keywords with high ROI
2 = keywords with low ROI
3 = keywords with zero conversions

Group 1 keywords should receive generous bids (and of course be optimized for quality as well), in order to push high Ad Positions.  They will convert at a certain rate, but our goal is to push upward on budgets to attain maximum click volumes.  Nothing special here.

Group 2 keywords should be scrutinized the heaviest.  We look closely at the bid history and routinely push downward; the goal is to register clicks at a very low overall CPC.  Showing ads at the bottom of the page won’t generate many clicks, but thanks to Hal we can now be confident that these keywords’ conversion potential won’t be profoundly changed by low Ad Position.  This tactic allows us to actualize ROI even among the poor performers, maintaining a conversion stream which would otherwise be forfeited.  All keywords, even the weakest ones, have an effective CPC at which they are worth bidding on.

Group 3 keywords are a tricky lot.  Some of them won’t have enough accumulated clicks or spend for the marketer to make a confident decision.  The others, however, may have branding potential, or perhaps act as a gateway to other more profitable content.  These should be abandoned in PPC, and become the focus of a targeted SEO campaign.

Aim for the middle!

Segmenting a PPC program is nothing new, nor is throwing a lot of budget at the best performing keywords.  However, with this research, Varian has given us a fresh perspective on how to treat the average performers.

We can be sure that the aggregate quality scores of each competitor in a given category will improve over time; this is inevitable as agencies continue to evolve their search engine marketing (SEM) capabilities.  As a result, all other things equal, the bid price will slowly become a bigger predictor of Ad Position — and if Varian’s findings continue to hold true, marketers who master this type of segmentation will retain the maximum ROI from paid search.

About Paul Burani

Paul Burani - Partner, Web Liquid Group. Connect with me on Google+

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