Everyone knows Google is and has been the internet darling of the last few years but very few people understand what it’s stratospheric rise in both the stock market and it’s dominance of online search has been powered by. Sure, it’s easy to use and by most peoples accounts (including ours) provides the best search results in a day-in-day-out basis but how is it making money?

The answer to that is in this great article by the New York Times. It breaks down the Google AdWords system and how it works. For those of you unfamiliar with it, when you do any search on Google you get a series of boxes on the right hand side of the page that are paid for by advertisers. What many people don’t know is how it works. It’s all based on a highly advanced auction system. Search keywords prices are determined purely through whatever your competitors want to pay for it. Brilliant system, and oh Lord do Google finances show it, in Fiscal 2007 Google raked in $16.5 Billion in revenues, 99% of it from those little ads on its site + its network of other sites who use its search results.

Sure, the amount of money Google is generating is interesting considering how simple its system is. What’s more interesting is how they are tracking what makes a “Good Ad” and all the factors that determine how Google places your ad, it’s not just based on how much you’re willing to pay. Here’s the meat of the article:

Traffic was growing rapidly, as was the average price that advertisers were paying for clicks. But Mr. Fox and others realized that measuring the average cost-per-click was not good enough. Users might be clicking on more high-priced ads and fewer lower-priced ads. That would cause the average cost-per-click to rise, but it would say little about the health of the overall system.

So Mr. Varian and Diane Tang, principal engineer in the ads quality group, helped devise what they call a basket of keywords. Much like the consumer price index, a basket of goods and services that economists use to track inflation, the measure is made up of a broad sample of keywords and is weighted to make it statistically accurate. This internal benchmark helps Google get a clearer picture of its performance.

As measurements improved, Mr. Fox’s team unleashed a stream of experiments meant to optimize the ad system. They evaluated changes to things like the clickable area and background color of ads, and the criteria for placing ads above search results rather than beside them.

Over time, the company also looked beyond click-through rates to rank ads. Google now takes into account the “landing page” that the ad links to, and, for example, gives low grades to pages whose sole purpose is to show more ads. Soon, the loading speed of a landing page will also be considered, Mr. Fox said.

These factors contribute to an ad’s “quality score.” The higher that score, the less the advertiser has to bid to secure top billing. For example, an advertiser who offers to pay $1 per click to attract those searching for “vacation rentals in Colorado” may receive more prominent placement than another who bids $1.50 for the same query but has a lower quality score. An advertiser with a very low quality score may have to bid so much for placement as to make it uneconomical.

Quality scores work as an incentive to advertisers to improve their ads, which benefits users and, in turn, benefits Google, Mr. Fox said.

Most interesting things are the amount of ads on the landing page being taken into consideration, and of extreme interest to us (since we started in the web hosting business) is the speed you web site loads being taken into consideration. We have been screaming from the rooftops for years that the speed + reliability of your web hosting is mission-critical to your site ranking well and, we’re sorry kids, $5 a month web hosting is not gonna cut it. That is why we spend so much money on top of the line servers, keep the server load as low as possible. We never put more than 400 customers on one machine, the industry average is 5000-10,000. Sure, it costs a lot more to do it this way, but the end result is sites up 100% of the time and load as fast as possible.

In conclusion, it’s extremely interesting to see that Google is taking the results of even paid advertisers landing pages so seriously. What does this mean to you? If your web site is chocked with ads, loads slowly/irregularly and is offline from time to time due to poor choice of hosting platform then you’re not only going to be ranking poorly on Google’s paid results and unpaid results engines, but you’ll also be losing money from potential customers. Update your pages design/hosting platform before its to late!