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Six types of clicks that Google gets paid less for

Posted October 18th, 2012 by Andrew Goodman

Google and its stock were hit with a triple whammy today, with a below-forecast earnings performance and more chatter about “declining average costs per click” coinciding with an unfortunate leak of their 8-K earnings statement and the need to prematurely release earnings in the middle of the trading day.

For a business of its size and age, Google is still showing amazing revenue growth. Growth in aggregate paid clicks is amazingly robust year-over-year, at 33%.

Where Google is getting nailed is the “surprise” drop in the average value of a click. So far, Wall Street analysts are doing a poor job of getting to the bottom of this phenomenon. And certainly, Google would rather release less information than more, for competitive reasons.

Anyone making their living inside this paid clicks universe from the buy side (for example those of us who understand how the platforms work and see them being used in a wide variety of ways) may have a bit more insight.

It’s pretty clear that the average prices of every click you want to buy — particularly on Google Search — aren’t down 15%. The economy has been soft, but not that soft. And most of the clicks in competitive auctions come through on expensive clicks in the top three ad positions. A lot of companies would have to drop out of the auction or bid down to have such an impact across the board, in cases where there are 4, 8, or a dozen or more solid companies bidding.

We can do better than speculating about what the click prices might look like on the “long tail,” or speculation on the idea that advertisers are bidding lower because they finally hooked up Google Analytics and saw conversion data for the first time.

I think a lot of buyers of clicks know exactly what types of clicks are coming on the cheap. The question really is how many of these bottom-fishing clicks has Google been willing or able to sell over the past few years. (Again — the total number of clicks sold is up 33% year over year. This is Google’s 12th year in the advertising business.)

Six types of cheaper clicks:

  • International markets. The U.S. has always been ahead in terms of business willingness to make heavy use of AdWords. Many other markets are “wide open” in the sense that you can pick up clicks for a song due to limited competition. Google once informally remarked that it relaxes Quality Scores in “less mature markets” where auction competition is weak. Makes sense; Google would rather take whatever money might be on the table for now, rather than take zero by keeping the reserve price so high that advertisers in those markets won’t pay for any clicks.
  • Smartphones (not tablets). For now, the business value of a click on a mobile ad is lower, and advertisers are bidding down (even where Google discounts the clicks to take account of the lower business value of a click) just as the use of larger-screen, more functional smartphones is exploding. Bottom line, Google is selling a lot more bargain-priced clicks in this channel. Someday, attribution will improve (that’s part of the reason Google is willing to stand up for itself in legistlative tussles around privacy policies), and that may prove up the value of some of these clicks either directly or indirectly. For now, the price of mobile clicks is not poised to go up significantly — but the number of them is. Does that sound like a reason for investors to panic about Google’s business? It doesn’t to me.
  • Display advertising. Clicks in display aren’t as valuable, on average, as they are in search. And Google is selling a lot more display advertising. The optics don’t look good on a CPC basis, but on a total revenue and profit basis, they’re just fine.
  • Clicks that are of marginal value to any business. Some keyword areas are worth a little more than zero to businesses. As they exhaust their stores of good-converting keywords, businesses run out of places to find more click volume. They add new ad groups to their accounts drawn from less effective keyword inventory that may be out there. Naturally, to even out ROI, they bid less on this inventory.
  • Clicks that might annoy users. Well over half of search queries don’t show any ads at all. But Google can scoop up a bit more cash if it decides to allow “click arbitrage” and just generally clumsy advertisers to lowball-bid across informational-intent search topics. Google gets religion for a time, then decides to sacrifice a bit of user satisfaction for more total revenue. Surprise, surprise, Google actually likes money. There’s no way of knowing at any given time just how much of this cheaper inventory Google has decided to bring into play; also little way of knowing if Google has explicit side deals with large buyers of this inventory like ask.com. Bad optics for investors looking at average CPC’s as a key metric, maybe. But if this isn’t hurting profit or revenue growth, it’s a red herring.
  • Brand clicks. More and more brands are biting the bullet and paying a few pennies a click to keep their ad (usually a larger unit with SiteLinks or other ad extensions) showing at the top of the page for searches for their company name, despite it usually also showing at the top of the organic listings. There can be good business reasons to do this. Because many brands can score solid 10 Quality Scores on their own brand keywords, depending what others may be bidding, they may be able to drive their CPC’s very low. (We’ve seen them going through for as little as 2 cents.) Advertisers who might have thought $1+ prices for these clicks were inevitable, and agencies who were lazily paying those prices instead of working to drive them lower, are slowly waking up to the methods needed to drive those Quality Scores up and click prices down below 50 cents. That’s a pretty big proportion of the number of clicks Google sells every day. Sounds like a pretty easy way to make 25 cents (or even 2 cents). Bad for average CPC optics, again, but not exactly something any investor should panic over.


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