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AdWords, Declining Click Prices (CPC’s), and Interface Optics: Two Theories

Posted January 24th, 2012 by Andrew Goodman

Google’s recent financial results weren’t nearly as bad as the markets seemed to think. By any rational standard, once again they turned in a strong Q4 and strong YOY growth. Earnings were very solid. All they did was miss Wall Street expectations slightly.

If revenues and profits were up sharply — but below expectations — were there any red flags at all?

It appears so. While total paid clicks were up 34% year over year, click prices in the form of average CPC’s were actually down a whopping 8% from the same period in 2010.

Google didn’t provide a breakdown, unfortunately. Did much of that come as a result of the growth in less targeted display advertising? It doesn’t appear so, because network clicks grew more slowly than clicks on Google-owned properties. So the softness is either within Google Search or YouTube or both.

What about search clicks? What about the prices of commercially valuable terms in hospitality, financial services, health, education, and real estate? What is happening now, and financially speaking, what will happen down the road with, the increases in paid local searches? Google doesn’t have to tell us, unfortunately.

There seems little question that the market for paid clicks is showing a bit of pricing vulnerability, in any case.

And what is perhaps doubly red-flaggish about that is that it is occurring in the wake of Google taking a variety of steps to exact higher CPC’s to wring more profit out of the existing traffic to Google Search.

Some search marketers believe that terminology within the interface, default settings, and even certain tools and reports, are intended to “frame” the auction so that a higher bid appears logical in order to achieve your marketing objectives. So with all of that Google intellectual firepower going into making higher bids seem sensible, the financial results indicate that marketers are largely turning up their noses at these bits of subtle persuasion.

Take, for example, the Bid Simulator tool. Personally, I’ve found it useful because it can remind you that currently, your volume could go up more than you think if you raise bids on a keyword — even if your reported average ad position is already high. That is, in part, due to the fact that Quality Score now determines eligibility for as well as position in any given keyword auction. If you have middling to low quality scores on a keyword, a higher bid may increase not only your ad position, but your “eligibility” to be served each and every time a relevant search query is generated by a user.

This projection tool works sensibly in the case of a specific term using a tight match type, such as the phrase match for “buy green barbie”.

It doesn’t work very well at all for broad-matched terms such as the broad match for “ontario place” or “love handles”. That’s because such terms have a huge reach potential (if you’re willing to bid into the stratosphere), but at a very high bid, they achieve that potential only by showing your ad to ludicrously untargeted searchers, and by cannibalizing traffic away from your more specific, well-optimized keywords. In this case, the Bid Simulator becomes relatively uninformative and relatively useless.

The real question I have is: (1) Did Google build things like this on purpose so that novice and lazy advertisers mess up their accounts and bid higher to gain added impression share, willy-nilly?; or (2) Did this just not occur to them at all? Did they just throw up the tool without any of this occurring to them?

Both possibilities are disturbing. I think I’m actually less disturbed by (1) — the prospect that Google was evil. When someone is evil, you are always planning your counter-move. With (2) — the notion that there are well-meaning folks pecking away at creating moderately useful features, but overall, are just mailing it in — would mean that institutional memory and passion at Google have given away to an uncoordinated mishmash of people just doing their jobs. The latter makes for a pretty boring narrative for a poor ol’ blogger.

5 Responses to “AdWords, Declining Click Prices (CPC’s), and Interface Optics: Two Theories”

  1. Gertrude says:

    I believe that the first option is the valid one. I don’t think they would just throw a tool. The scale is to large so you won’t think ahead.
    Nicely written.

  2. aaron wall says:

    When they squeeze revenues they drive some business & some keywords out of the marketplace…I think they don’t really care if that happens so long as their aggregate spend goes up without noticeably hosing the user experience.

    Even with Google+, where the scraped version of a publisher’s content outranks the original source, when you see Google talk about it everything is framed in terms of “user experience” and “internal metrics” to legitimize such efforts … they don’t really care that much about most of their business partners.

    Outside of juicing revenues it appears that “impact on ecosystem” is at most an afterthought … after all, it was AdSense that funded eHow.

  3. aaron wall says:

    One thing I meant to ask…I have a presumption that a lot of the lower CPC from the quarter was in part driven by them getting more advertisers to buy their own brand & to do so with sitelinks in the ads (I think those are called adlinks).

    Did you see any correlation with that? RKG had a post where they show that over the past 18 or so months that ppc clicks on branded keywords went from 40% of organic clicks on the same terms to about 140%

    Brands having a high quality score would lead to lower CPCs & if you look at the top 500 keywords from a list like Wordtracker a ton of those are indeed navigational search queries. To me this is one of the most sound explanations of why clicks would jump so much & CPCs would drop, without any material change on domestic vs international & so on.

  4. Andrew G says:

    Hi Aaron,

    I agree. In addition to a few other trends leading to an aggregate lower CPC average, brand clicks are up. I tend to believe that yes, it is flowing through the increased use of Sitelinks, and more navigational queries flowing through those brand ads. They are low cost for advertisers and in our view, a pretty good use of minimal advertising funds. Those clicks are often going through at 5-10 cents apiece and with conversion rates of 15-30% they are a no-brainer, since along with organic Sitelinks they push other messages down the page.

    I doubt it’s as dramatic as RKG’s sample across the board, but it is a factor for sure.

    YouTube and the network must be a big part of it too, though.

  5. aaron wall says:

    Thanks a bunch Andrew!


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