If you thought that ads were appearing on your site solely for how much the advertiser is paying, think again ;) If you are an AdWords advertiser, you are probably aware of the ad ranking system and how it can rank lower paying ads higher, thus appearing above higher paying ads. The same also applied in AdSense.
Inside AdSense tackled this tricky issue today on their blog.
So, you ask, how is Ad Rank determined? While bid price (the price advertisers are willing to pay for each click per thousand impressions) is obviously an important factor, we also calculate advertiser Quality Score to make sure the best performing ads will always appear on your site. Quality Score takes into account factors such as an ad's relevancy and click-through rate (CTR) (i.e. how likely users are to click on a given ad) because a higher CTR sometimes outweighs the benefits of a higher bid price. This ensures that your site always displays the ads representing the highest revenue potential for you.
It is also worth noting that they include information specifically on image ads, as some publishers have opted out of image ads under the mistaken impression that image ads earn less.
You might also wonder: "But image ads usually take up multiple ad slots -- does this limit the amount of money that I can make?" Good question, but no -- for an image ad to appear on your site, it has to produce an effective CPM greater than the sum of the individual text ads.