Links play a very important role in search engine ranking algorithms. Why?  Because search engines, specifically Google, perceive links that reside on other websites (often referred to as backlinks or inlinks) to represent "expert" opinions of a target website. Google values the link text (anchor text) as a method of determining what the "experts" are saying about a target site.

From an Organic Optimization point of view, links affect your website rankings in 2 distinct ways.

1. PageRank Improvement
2. Link Reputation

PageRank is passed from one website page to another through backlinks.  More backlinks typically means higher PageRank values.  Stanford University’s patent (licensed to Google) includes the following formula describing PageRank.

PRA = (1-d) + d (PRT1/CT1 + ... + PRTn/CTn)

Where:

PRA is the PageRank of a target page.
CTX is the number of outbound links on a backlink page.
d is a damping factor (typically .85).

PageRank of a source page is equally distributed (passed) through all the links that reside on that page to each backlink page.  A few examples will help illustrate the concept.

 Note: PR values published on Google’s toolbar are considered to be log values.

Link Reputation is often times the more important aspect of a backlink.  When backlink text (hypertext or anchor text of a link) includes the keywords, it is said to have high Link Reputation.
For example, many Internet links to www.gerber.com read “Gerber baby food”.  Since the keyword phrase “baby food” is found within the hypertext link, search engines associate the phrase “baby food” with www.gerber.com.  This association of keyword - hypertext with the target link produces stronger search engines rankings for that keyword.

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