How google ranks ads
Google uses a number of factors to determine where your ad will be positioned within its SERPS. The main factor that we can influence is Ad Rank.
Ad Rank Explained
Ad Rank is Google's primary method of arranging ads in order on its SERPs. Older PPC systems relied on a pure auction - whereby whoever was prepared to pay the most per click was ranked highest, with the 2nd highest CPC being 2nd and so on.
Google introduced Ad Rank to make things fairer for those without the deepest pockets - and also, of course, to maximise its own revenue!
The system is a calculation based on multiplying your maximum CPC by the Click Through Rate of your ad. Click Through Rate is a measure of the popularity of your advert, being the number of times your ad was clicked on as a percentage of the number of times it was shown in the SERPs. (e.g. if your ad is shown 100 times, and it is clicked on twice, you have a CTR of 2/100 = 2%).
Example
Web Site 1
CPC = £1
CTR = 2%
Ad Rank = CPC x CTR
= 1 x 2 = Ad Rank Score 2
Web Site 2
CPC = £1
CTR = 3%
Ad Rank = 1 x 3 = Ad Rank Score 3
In the above example, Web Site 2 would be positioned above Web Site 1 in the SERPs, as it has a higher Ad Rank Score, despite the fact that both sites are prepared to pay the same in CPC.
This system rewards good advert copy, as you can be ranked higher than sites that are prepared to pay more in CPC, through attracting more clicks on your ad.
Conversely, of course, if you are prepared to pay more in CPC, your Ad Rank will also rise.
So the 2 main techniques you can use to improve your position in the SERPs are:
1) Increase your CTR through better, more attractive ad copy
2) Increase your CPC
The most inexpensive and effective way to ensure your ads are positioned where you want them to be, then, is to write the best ad copy, following the principles already outlined.
As mentioned before, the ads that are highlighted at the top of the page - with a blue background, positioned above the natural SERPs listings - are the best-performing ads in terms of Ad Rank. Your ad will need to have been reviewed by a Google AdWords editor in order to be eligible to appear in one of these positions. It will also need to meet an undisclosed minimum Ad Rank score.
There are 8 positions available at the right hand side of the page, and a maximum of 3 at the top of the page - giving a possible total of 11 ads per page.