Google claims it ranks Adwords and AdSense ads by the product of the bid times the ad's quality score, which used to be the Click Through Rate (CTR) and now is 'determined by your keyword's CTR, relevance of ad text, historical keyword performance and other relevancy factors' --it seems other relevancy factors is Google's name for a fudge factor. It is widely suggested that this basically boils down to the keyword's bid x CTR. In fact, Yahoo launched a whole new ad system, in no small part to copy this feature. At Adapt, we set out to test whether this was indeed the case. To our surprise, it was not at all, at least in the data we collected. Bid (maxCPC) seemed to be the sole determinant of the distribution of impressions among six ads in the same account, while Bid x CTR (as measured by the last 1,000 impressions) was not:

Before you conclude that Google lies through its teeth, note that this is consistent with a model that uses CTR of the campaign or account, and not of the keyword, to compute quality scores. This is consistent with a recent article by Robert X. Cringely. These are Google's words on the matter: "Each keyword has a minimum bid that is based on the quality (also called Quality Score) of the keyword specific to your account". You can reach your own conclusion as to whether 'based on the quality of the keyword specific to your account' means that the score is based on the quality of the keyword or the account. Hey, Googlers are known for their coding skills, not their eloquence. We do know that minimum bids are keyword-specific. The CTR component of quality scores, though, appears to be computed at the level of campaigns or accounts, not keywords or adgroups. It looks like it's at the account level --not campaign: a new campaign gets assigned a low quality score right away.

Why would Google do this, and punish good CTR words together with bad CTR words? To provide an incentive to advertisers to not advertise on irrelevant words, which cost Google money until their system can determine that their CTR is low (and even then cost space and processing time in the system). Worse, they cost Google in relevance to searchers, which goes against Google's religion.

Up to Search Engine Marketing.