The Highest Quality Score is not Always the Best Quality Score

Posted on Tuesday, November 10th, 2009 by Print This Post Print This Post

Categories - Featured, SEM

The mathematical formula for AdRank is so simple that it's surprising how frequently, and grievously, people can sometimes get it wrong.  Google makes it clear that the ads in a given auction are sorted in the sponsored search results from highest AdRank to lowest, where 'AdRank' equals the ad's bid multiplied by its Quality Score. AdRank=bid*QS Quality Score (QS) is a value reported by Google that is likely closely tied to an ad's clickthrough rate (CTR).  I've described why this is so in a previous post of mine called 'Why is Clickthrough Rate the Main Factor in Quality Score'. In a sense then, Quality Score acts like a multiplier whereby Google treats dollars from some advertisers as worth more than dollars from other advertisers.  If your Quality Score is double mine, then I need to bid $2 for every $1 that you bid.  The actual cost-per-click (CPC) that an advertiser pays is simply the minimum amount they would need to have bid to beat the ad located below them: CPC=AdRanktobeat/QS So, if your AdRank (that is, your bid multiplied by your Quality Score) is 6.000 and I have a Quality Score of 2, I must bid $3.01 to beat you.  If I raise my Quality Score to 3, then I need to only bid $2.01 to beat you.  And if I manage, by testing lots of different ad copy, to find a version that gets a great clickthrough rate which results in a Quality Score of 6, then I need to only bid $1.01 to beat you. Since each ad is only required to pay the minimum cost-per-click necessary to beat the AdRank of the ad located below it, the naïve perspective is that it is always beneficial to increase QS.  Optimization, in this view, is synonymous with maximization. Unfortunately, it can easily be shown that it is not always in an advertiser's best interest to have the highest Quality Score possible.  This is why it was disturbing to see a recent post by George Michie, consistently one of the most lucid voices on subjects related to pay-per-click advertising, saying the exact opposite recently at the Rimm-Kaufman Group's blog.  Like most of Mr. Michie's posts, this one is worth reading in its entirely, but to quote the passage most relevant to this discussion:
"...there is no complexity involved with QS strategy. You want the QS to be as high as possible always. That doesn’t vary by season, or by time of day, or by category. It doesn’t depend on stock positions, margin structures or return rates. Higher is better, and the mechanisms for making improvements are obvious."
If only it were so simple.  But it can be made clear by example that higher Quality Scores are not always better.  Consider an advertiser who is faced with showing two different ads: one that's generic enough to attract many clicks and another that's specifically targeted so that it gets few clicks, but the clicks that it does get are from users who are likely to actually purchase the product.  (In advertising parlance, this is called 'qualifying' potential customers.)  The numbers below are fictitious, but realistic: QualityScore-sheet We can see that by showing the generic ad 1000 times, we attract 100 clicks, resulting in 15 conversions.  If each conversion brings in $100, then our revenue is $1,500.  If each click costs $5, then our profit is $1,000 (or $1.00 per impression), the clickthrough rate (CTR) for the ad is 10% and the Quality Score might be something like 10.  In contrast, the targeted ad might also be shown 1000 times, but get only 30 clicks, among whom are the same 15 people who would have clicked on the generic ad.  So, our revenue is still $1,500, but the cost (at $5 per click) is now only $150.  Thus, our profit is $1,350 (or $1.35 per impression). Of course, because the clickthrough rate is now only 3%, the Quality Score is likely to be lower (let's call it a value of 3, even though the Quality Score value that Google reports is probably not a direct, linear function of CTR).  But that doesn't matter to the advertiser, because the profit is higher.  Mr. Michie said: "You want the QS to be as high as possible always", but in fact the purpose of all economic activity is to maximize profit, not clickthrough rate nor Quality Score.  So, when performing tests of competing ad creatives, we should judge them by the differences in profit they generate per impression, irrespective of the Quality Score values that Google reports.

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9 Responses to “The Highest Quality Score is not Always the Best Quality Score”

  1. Nicely put Bradd,

    Guess it raises the debate of whether using pre-qualifiers in ads is a feasible strategy. Messages such as “apartments from $750k” or “minimum 25 people” would without doubt filter out people looking for cheaper apartments or smaller group bookings, so CTR (and therefore Quality Score) would reduce.

    You will receive higher quality visitors, but does this outweigh the reduced ad rank and reduced overall click volume to your site? Would it actually increase total profit, or just increase margins?

    As with most things PPC, guess it comes down to finding the right balance.

    Alan

  2. Bradd, thanks for setting me straight. Dang, I hate it when I’m wrong!

    In my defense, there’s an important qualifier earlier in the post which gets to your post. I wrote:

    “And, testing to find the phrasing that generates the best CTR without torpedoing conversion rates makes sense.”(emphasis added)

    We totally agree that you can maximize CTR and QS by saying “Everything is Free”, but that would be disastrous strategy. In an earlier post, I mentioned that in some ways the PPC game favors discounters. Those who can CREDIBLY say “low price guarantee” enjoy a huge advantage over those who can’t.

    Bottom line: you’re right. What I should have said is: within the confines of phrasing that doesn’t hurt conversion rates, higher CTR is always better. Really important caveat I missed.

    Thanks for setting me straight!

    George

  3. Marty Livingston says:

    Do the generic ad and the targeted ad need the same AdRank to get the same number of impressions(1000)? If so, because of the low quality score, the targeted ad will need to bid 333% more. This makes the ad cost and the profit exactly the same in both cases.

  4. Rick Miller says:

    Ah, but what happens when Google refuses to display your ad due to “low quality score?” I have a client who sells a very, very niche type of IT consulting service. Due to the low click-through rate of our keywords, we always get assigned a low quality score and sometimes Google doens’t display the ad at all.

  5. Dustin Lemos says:

    I disagree completely. In the situation you described, the ad with the lower quality score performed better because the ad was more targeted to potential buyers, *not* because the quality score was lower. Hypothetically, had a similar ad been given a higher quality score, it would have performed even better than that one. Do you see where I’m going with this?

    As your post illustrated, quality score isn’t the only factor in determining an ad’s profitability. However, Michie’s original statement still holds true: all variables being equal, it’s always better to have a higher quality score than a lower one.

  6. Dave Davis says:

    Apples to Apples. The thing is that Quality Score IS directly tied into profit because the higher the quality score the higher the ad will be positioned for the SAME price resulting in increased clicks for the same price and an increase in profit (hopefully). It’s up to the advertiser to convert the visitor on the landing page and they’ll have to work harder to optimize for the inevitable increase in numbers of personas due to the higher click volume.

    You’re dead right, the aim of the game is to maximize profit but improving CTR (and hence QS), if done right can do just that. I think with the new search funnels release we’ll be able to see how this relates to being relevant and the need to improve QS.

    If your negatives are up to date and your keyword research is done correctly, EVERY click is worth something or CAN be worth something and improving quality score can increase that “margin” if you’re doing everything else right.

  7. Dr. Pete says:

    I completely agree. I have clients in some very aggressive/expensive markets, and we’re constantly forced to choose between keyword-match ads with good CTR but lousy conversion and brand ads with low CTR but much better CPAs. Ultimately, you have to do the math.

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