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Thursday, April 01, 2004

Google to Take "Actuarial" Approach to Pricing AdSense Clicks?

Savvy online advertisers are aware of the pressure that's been on Google of late to follow in Overture's footsteps and allow advertisers to bid separately on content-targeted listings vs. search listings. An AdSense Update email just sent out to publishers refers to "enhancements to our pricing model for advertisers." In particular, the price per click on content-targeted ads will be "automatically" adjusted "based on their expected value to the advertiser." The main technique here seems to be to assess the degree of commercial intent that might be associated with different pages on which ads appear, pricing clicks lower when they appear on (eg.) discussion forums and higher on more commercially-oriented pages, like buyer's guides.

On paper, that makes sense, but I can already hear the complaints that will undoubtedly be coming from advertisers: we still don't have control over the bidding on content targeting, let alone a way of blocking sources of poor-quality traffic, or a way of bidding higher to appear more visibly on the sites which convert the most sales for us.

We'll take what we can get, for the time being: a tacit admission that clicks on contextual ads have often been mispriced, and an albeit arbitrary lowering of the average CPC on content-targeted clicks across the board in order to give some vacillating advertisers more incentive to take the plunge on content targeting.

The unfortunate side-effect, though, might be that for the minority of advertisers who've had anomalously strong performance with AdSense-published ads may see their average CPC's actually rise somewhat, or at least stay stagnant. On the other hand, such advertisers won't ever be charged more than their maximum bids, so they're protected in that regard.

At this stage we expect most advertisers will give this workaround the thumbs-down even if the bottom-line impact is positive on most, mainly because the process is too mysterious. I've been told that "a girl's gotta have a little mystery," but we're not sure that advertisers will feel the same way when the mystery's applied to their ad broker's billing formula.

Here's the really good part of the announcement, though, and this may be where the real intent of Google's new policy lies. Google implies that some publishers may see a decline in revenues, while others will see an increase. Google can mysteriously apply its actuarial tables to assign different values to different "classes" of publishers as a response to the rise of a parasitic class of site owners who are happy to collect AdSense revenues by (somehow) generating clicks on ads while offering little true of true value, in the form of a receptive buying audience, to advertisers.

Google, as they take frequent pains to demonstrate in their public statements, needn't disclose all details of their methodologies here. While the public announcement states examples comparing a "discussion of cameras" as opposed to a "review of digital cameras," there may be other quality notations kept on file. Editorial review of AdSense publishers, coupled with PageRank, might be used as a check of quality and factor into the overall formula to determine the expected value of a click. Sites that are deemed very low-quality, or which seem to resemble other sites which have frequently sent poor quality traffic to advertisers, could potentially see their revenues plummet based on the new formula. Although the formula isn't necessarily based on *actual* conversion data, it might be based on studies and tests that have been done to assess what types of sites typically are leading to high conversion rates to sales in advertisers' campaigns.

Notice I say "might," "seem," and "could." As always, Google leaves plenty of room for speculation.

Complex? Inexact? Sure. But there's never been any perfect way of buying, selling, or pricing online advertising. A colleague's recent experience buying "targeted" ads on a major portal at a "rock bottom" CPM price of 0.60 attested to that. The cost per lead in that venue was 900% higher than the same campaign run on Google AdWords (with content targeting turned on), and 95% of the "good inventory" on that big portal buy came from one source -- big banner ads appearing in web-based email accounts.

Which is a long way of saying that in spite of the many expected grumbles about this latest change to Google's ad pricing, if the price is right, many advertisers will jump all over it. Compared to other forms of advertising, the price is pretty good.

I've provide more details as they become available, likely later today.

Posted by Andrew Goodman




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