Google Top Position Pricing Motivational Analysis

Google announced yesterday (2007/08/08) that the pricing system for placing adverts above organic search results is to change. What effect will this have on advertisers and other Google stakeholders, and what reasons might Google have for doing so?

As you might expect, a first pass analysis suggests that Google is using this to increase revenue streams. However, the consequential effects may be more subtle and may be the real motivation.

The key to the announcement is probably this key phrase about the top position minimum price from the FAQ:

Your actual CPC will continue to be determined by the auction, but subject to a minimum price for top spots.

In other words, this is yet another fudge factor for the still rather mysterious Quality Score. It lets Google put a thumb, hidden, on the scales for the auction, and adjust how much revenue is extracted.

Who will it affect?

This action should have a significant effect on a wide range of AdWords users, including advertisers, agencies, affiliates and publishers. Curiously, I can’t think of either positive or negative effects for users, but that’s partially because the chain of consequences is so complex. Working out whether this makes for a better or a worse user experience is particularly opaque. And I think that may be the biggest weakness.

Users

Google has mostly grown huge because, in 1997 and until relatively recently, it clearly offered a significantly better search experience; in the last few years the major competitors have offered broadly similar results. Google, in talks to advertisers, and in the practical advice of Googe Account Strategists, emphasises the user experience. Most things that Google does (like the motivation for the Quality Score) can be traced back to, at least in part, user experience. I can see how most of the things that are done will benefit users, even if advertisers are left confused and out of pocket.

This change? I simply can’t see any clear user experience gain. And that’s is really worrying. If the accountants have seized control, then expect further changes that do not help users, or even worse, inconvenience users, just because it yields a Google revenue optimisation.

Maybe I’m confused by the negative effects on many of my clients and psychologically I don’t want to see any benefits from this change… I just don’t see how this hidden factor results in adverts that better match user expectation. If anything, I think this increases the opportunities for high value advertisers who service smaller audience segments. That should result in a lower volume of clicks going to the highest positions. Revenue is sustained by manipulating the MinCPC, but that doesn’t appear to be a user benefit.

Advertisers

Advertisers who currently are in the magical top positions, and advertisers who want to be there, will be affected. Do these form any specific groups? From looking at our client base, we expect that the main effect will be on major consumer brands. If you have a major brand, then you may achieve the number one top position and pay only $0.01 per click, today. With Google’s thumb on the scale, they can increase the minimum cost per click, thereby increasing revenue.

This will in turn damage the overall account Return On Advertising Spend (ROAS). Many large consumer brands make their highest ROAS from their key brand terms. The consequence will be that keywords below ROAS targets will drag the account well below the target ROAS, and so these marginal keywords will no longer be bid by the major brands. That creates more opportunities for affiliates to find effective keywords, far from the main brand keywords. It should make broad match less attractive for major brands - because broad match tends to attract more marginal search queries.

One other way to look at this is that Google wants to take more share of major brand equity investment. It takes a lot of money to establish a brand. Getting users to search for a brand rather than a generic term costs that brand. When Google can raise their revenue by taxing usage of brand searches, then it imposes an additional brand cost, yields no additional revenue to the brand owner, but makes a pile of cash for Google. I’d be pretty damned cross with Google, if I owned a major consumer brand.

For non-brand queries, such as “mortgages”, “holidays”, etc? The effects for advertisers are likely to be complex. Right now, I expect that Google revenue will increase. This may dislodge some advertisers who, while getting high enough CTR were not getting enough sales to really justify the spend. These advertisers will disappear not just from the top positions, but from the search altogether. That will open more opportunities for advertisers who better match the search query with a web site that converts better. That is potentially better for users… if this chain of effects is what happens.

Agencies

Will need to rework expected revenue changes and adjust their mix to reflect the poorer ROAS from high volume, low AvCPC keywords. Since the precise effects are not yet known, this will raise client anxiety about meeting targets, and probably cause quite a bit of threshing.

Publishers

Publishers are in an interesting position. Many larger publishers of keyword search adverts take only the highest position (and hence highest revenue) adverts. This move will put more cash into the pockets of publishing partners. This could be seen as competitive positioning against Microsoft and Yahoo. By paying out more money to publishing partners, Google can buy their attention and fend off competitors who are willing to offer high revenue shares in order to woo the high volume publishers.

Part of this is probably a reflection of the way that the generalised second auction bidding system can be operated. There appear to be two main ways that this auction can be run:

• Once per day
• For every impression

If the auction is run once per day, then all advertisers take part, and their AvCPC will be a reflection of what they would pay, if every advertiser participated in every auction. Since many advertisers have budget limits or day parting constraints, this auction systemn results in higher paid prices.

If the auction is run for each impression, only for the advertisers that have funds for that impression, then the number of advertisers is smaller, and on the whole, the auction will result in a lower price.

Google appears to use an auction for every impression (with some data that is calculated daily). MSN appears to use an auction that is daily. I can’t decide what Yahoo’s auction is doing. It may be something else altogether.

By increasing the AvCPC for top positions, Google can present more revenue to high volume publishers. This may be Google’s real goal. Continuing to expand publishing networks and rewarding publishers by paying them more advertiser funds.

Affiliates

I can see advantages and problems for affiliates. I haven’t yet worked out whether the net effect is positive or negative. Much as with users, I can see some good and some bad stuff.

What can and should major brands do in response?

After a few hours of thinking about this, I suspect that the major response should be to review content match programs, and that this may be the secondary motivation for Google.

If your ROAS is being damaged by higher costs on your main terms, you should be looking for other low cost opportunities to make sales. Google has been pitching content match to major accounts over the last few months and incentivising agencies to make more from content match programs. Historically, large agencies have usually turned off content match for their clients, unless a major branding exercise has been under way, and the performance metric is eyeballs rather than sales.

By expanding content match advertising, major brands can decrease the average cost per click. Since Google appears to have been spending effort in cleaning up the content network, they probably feel that it merits renewed interest from advertisers.

Summary

I may entirely rewrite this article (well, I’ll probably write a new article, back refer to this, and put a prominent “Superceded” warning near the top).

I’m not at all convinced that this change helps users - and focusing on the user has always been Google’s main winner. Sacrificing, or at least having no clear benefit for, the user experience in order to generate revenue gains is counter to the culture that has brought Google to prominence.

I’m not feeling positive about this change. It looks like another way for Google to manipulate search behind the scenes, without any clear advertiser guidance, or attention to the benefits that advertisers can and should reap.

The only clear beneficiaries appear to be Google and larger publishers.