Yesterday, Google announced  that it was releasing a major change to its Ad Rank algorithm, which determines the order of the paid search ads on each SERP as well as how much advertisers pay in the ad auction .
In a nutshell, Google is now using the presence and performance of ad extensions in determining Ad Rank. Previously, Ad Rank had just two components: your Max CPC Bid (the most you were willing to pay per click) and your Quality Score (Google’s assessment of the quality of your keywords, ads, and landing pages). Now, the formula has three components: your Max CPC Bid, your Quality Score, and, as Google puts it, “the expected impact from your ad extensions and formats.”
I was chatting with our founder, Larry Kim, about the change, and he noted that this change is bad for small and medium-sized businesses (SMBs).
Here at WordStream, we’re committed to helping small advertisers succeed at PPC, so I want to dive a little deeper to give my take on why Larry is right.
It all starts at the top
Before diving into the numbers, let’s take a look at this change from 10,000 feet up.
Previously, Google had a pretty simple message for advertisers: Be highly relevant and you can reach qualified searchers at a great price. Even if the calculation of Quality Score was a little bit of a black box, the message resonated with advertisers because they understood why Google would reward good advertisers and punish bad ones.
With the new change, Google’s message has changed from the simple “be relevant” to the more vague “be relevant and use more of Google’s features.” Even if Google believes that the ad extensions make for a better paid search experience, it has to recognize that the message is significantly more complicated, which makes it harder for SMB advertisers to understand what they are supposed to be doing. Plus, it makes all of those great Hal Varian videos obsolete!
How Will the New Ad Rank Formula Impact SMBs?
Now that we’ve established that the change makes advertising on AdWords more confusing, let’s see how requiring the use of ad extensions will actually impact SMBs.
If all SMBs already used ad extensions, then this wouldn’t be a big deal. Unfortunately, the reverse is true. According to our research on small business AdWords accounts , very few of them are currently using ad extensions. For example:
- 19 out of 20 SMB advertisers do not currently have call extensions set up on all mobile campaigns
- 20% of SMBs send all clicks to their homepage
- 25% of SMBs send all traffic to just one landing page 
This data indicates that not only do advertisers need to start using ad extensions more, they also need to make fundamental changes to their websites so that they have enough landing pages to utilize sitelink extensions where appropriate. With this change, Google is actually influencing web design (assuming that you don’t want to get penalized by Google), which could prove to be overly burdensome for less sophisticated advertisers.
And because ad rank depends on the actual performance of these extensions, not just whether they’re there, Google has now given advertisers another thing to optimize on top of their keywords, text ads and bids. Otherwise, you risk being crowded out by larger, more experienced, bigger-budget advertisers .
What’s the Good News?
The good news is, ad extensions are free to use, so you don’t need a bigger budget in order to make the most of them. You just need the savvy to know which ad extensions to use and when . This is one of the easiest ways to increase your click-through rates and Quality Scores, and now using extensions is more important than ever.
As I mentioned at the beginning of this post, WordStream is committed to helping SMBs achieve PPC success. We know that as AdWords continues to get more complicated, there is a greater need to help advertisers focus on the most impactful actions that they can take, so we’ll be working tirelessly in the upcoming months to help advertisers create and optimize their ad extensions. That’s why we recently introduced a set of tools to help you build landing pages  more quickly and easily. It's also why we’re currently running a contest to give one lucky advertiser a $25,000 marketing makeover. That’s $25K in free advertising spend for AdWords, plus tools from WordStream and Constant Contact to help you use it. Throw your hat in the ring here .