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Tuesday, September 26, 2006

Google Advertising Platform: Winning Battles to Win the War... (or, Why My Pain is Google's Gain)

The formula for Google AdWords ad rank changed significantly in August, 2005. As I'm discovering, there are still many advertisers who simply aren't aware of this. Many have taken leaves of absence from either paying attention to the details of paid search, or from in fact spending on it. I regularly encounter new clients who shut down their accounts 1-2 years ago because they weren't profitable, but they're now realizing they can no longer get by with "all organic," especially as the holiday season hits full bore.

For those who still haven't combed over the extensive updates I've provided to paid subscribers, including this July 2006 newsletter update with the article "New Quality Score Formula & Google's Ulterior Motives," [subscription required - to be a subscriber you need to purchase the Google AdWords Handbook package], now might be a good time.

The ad rank formula in the past (CTR X Max CPC = ad rank, subject to additional editorial rules and a minimum CTR threshold) was a minor black box because you couldn't see competitors' bids, and you don't know what their clickthrough rates are.

The new regime - dubbed Quality-Based Bidding (QBB) - is essentially a giant hopper that Google can use to (a) throw in all sorts of priorities in different combinations to achieve various business objectives; (b) to optimize their revenues; (c) to make search engine users happier. (b) and (c) are distinct enough to be worth highlighting, but are just subsets of (a). The black box got significantly blacker.

One of Google's business objectives is to increase advertiser confidence, especially among deep-pocketed, big business advertisers, many of whom haven't gone "all in" yet. That's still secondary to preserving the user experience. But in many cases, "quality-based" initiatives have the exact same effect on big potential advertisers as they do on ordinary users -- they increase confidence in the medium. Google has taken a systematic approach to removing "chintzy-looking" ads that anger or worry both of these major stakeholders. They do it largely with algorithms that are being refined all the time, and for those heavily impacted, it takes savvy to get around those algorithms, if it can be done at all.

That creates very high minimum bids on some kinds of keywords in some kinds of accounts. Sometimes, an advertiser will give up in the face of this - but other times, we'll actually raise our bids. It's not a pure cash grab for Google, since the long term goal (increased big-advertiser community confidence) is the main reason for all this, but it doesn't hurt their revenues either. One thing that's being overlooked is the ongoing revenue bonus that comes from the new "keywords are never disabled, they can always be activated with a higher bid" regime. It sucks to bid $2.00 when you would love to try to keep a keyword "alive" at 20 cents as you could try to do under the old system. Then again, all those attempts to keep low-CTR keywords alive, ultimately failing, were a huge waste of everyone's time. I'm running a successful lead generation campaign right now where some cost-effective keywords are garnering clickthrough rates below 0.1%. Try doing that under the old system. Sure, it doesn't feel like a bargain because I'm bidding near $2.00 for keywords, with an overall average CPC 0f 0.68. But it's a campaign that works, that's the bottom line.

That's why I'm a bit disappointed in Henry Blodget's recent analysis that boilds down Yahoo's woes to an overall ad slowdown; he puts forth the claim that this will affect Google equally. Google not only has a lot of breadth in its revenue base across wide swaths of keywords, but robust international diversification. Most of all, the systematic plan to raise the confidence of deep-pocketed advertisers - not by "wooing" or "selling" them, but by focusing on fundamentals and quality - needs to be understood by analysts.

I don't know or care what will happen quarter to quarter, but this long term plan is part of what Google has secretly tossed into the Quality-Based Hopper (QBH). They'll continue to tweak that formula behind analysts' backs. And from here is looks like their lead on Yahoo is now 2-3 years wide. Ad slowdowns affect everyone equally? Maybe in 2000, when nearly nothing made sense. We've iterated a lot since then.

Posted by Andrew Goodman




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