How Google REALLY Treats Your Internal Links – Part 1
There has been much debate in the past few months as to whether or not Google recognizes, and passes link equity, to multiple links to the same page with different anchor texts. There is a recent post at SERoundtable that has re-sparked this debate and some of the comments disgust me.
But first, here is the basic theory of how link equity is distributed throughout your site:
Say you have 10 links on your homepage that go to internal pages in your site. That means that the link equity (juice) is divided in ten and only 10% of the authority from the homepage (which is almost always your strongest page) is sent to each of those pages equally. Now if you used the no follow tag on five of those links off the homepage that were going to pages you don’t care as much about ranking then each of the remaining five links that are followed would get 20% of the link juice! My good friend Ricardo, from eVisibility, has an excellent post with visuals to explain this (those buckets are now famous and have gotten that blog many reputable backlinks!).
This is why people use the follow tag to sculpt page rank throughout their sites. It is a a wonderful technique that has worked great for myself and for clients. However, there are people out there who feel that using the nofollow tag to sculpt your pagerank can set off some sort of red flag to Google and you can get penalized. People have even claimed that this is the reason they lost their rankings! Poppycock! Everytime a site owner loses rankings they look to place the blame on their SEO right away. When this happens to someone, they become VERY emotional and upset because losing rankings can kill your business. “It just doesn’t seem fair,” people cryout, ” that Google has so much power over my situation.” Hey everyone, Google giveth, and Google taketh away. But Google does not penalize or flag your site for using the nofollow tag. They have said repeatedly, and Matt Cutts too, that it is OK to use.
Now I believe that you should not use the nofollow tag excessively, but use it in ways that make sense. Its all about common sense folks! Use it to block Privacy Policy, Sign In, and other useless pages or links. And I only like to use it on the homepage and MAYBE some internal product/service pages. But you must always leave a link to the sitemap or the rest of your internal pages somewhere so that the spiders can index all of your pages.
In part two of this post I will discuss my findings, from stringent testing, on how Google really treats your internal links. I will debunk all of the myths and finally set things straight. I cannot divulge that info just yet as I have made and agreement to withhold our findings until we formally announce them at the San Diego Ad Club Interactive Marketing Day this coming week. Steve Peron, aka imnotadoctor, will be presenting our findings during this event and will be blogging about it over at eVisibility Insider blog as well as our own blogs.

Does anyone have a example of this helping long term?
(3 + months?)
Ankur, I wish that I had more concrete and longterm definitive examples to pull from but I do not. What I do know is that I have seen the flow of pagerank altered from using the nofollow and from that you can deduce that it is flowing authority. Because even though pagerank is not the end all be all sign of trust with Google it still is a factor in ranking. Now I have also seen a rise in rankings after the shifting of PR on that same site but as with most of SEO the increase in rankings could theoretically be attributed to many different factors being applied to the site.
In order to really setup and isolated test one would have to take two new domains and build exactly the same links at exactly the same times and have them both optimized exactly the same for the same keywords. Then one would have to use the nofollow on the one and not on the other and see which one performs better.
Whew, that would be alot of work. Trust me, it does have a helpful effect. You need to think in terms of common sense too when you analyze this. Blocking the spiders from your useless pages like the link to a “Log In” or “Privacy Policy” page makes sense. You want Google to focus on your most important content first.