Ad rank is the formula Google uses to assign the position of a keyword targeted ad. It is determined by multiplying the maximum CPC bid that the advertiser is willing to pay by the quality score of that advertiser. An ad’s position is then determined by the advertiser’s ad rank, awarding the highest position to the advertiser with the highest ad rank.
In the chart to the right, advertiser “Blue” has the highest ad rank and is therefore given position number 1. Also, keep in mind that Google calculates ad rank and quality score at the decimal level to accurately determine position. Cost per click is determined by taking the ad rank of advertiser below “Yellow” and dividing it by the quality score of the advertiser above “Blue. So if you are advertiser “Blue” your CPC would be $1.33. (“Yellow” ad rank of 8 divided by “Blue” quality score of 6). Google then adds $0.01 to the final number to ensure the advertiser above is paying at least $0.01 more than the advertiser below.