I was uncertain what effect the new algorithm changes would have on affiliates. I think I’ve now uncovered what is happening. If you aren’t an affiliate, or don’t run affiliates, this may appear to be of little interest. Bear with me, as I think this article illuminates some important principles with AdWords.
Ignoring affiliates, for the moment, the general effect for mass consumer brands seems to have been to increase CTR and, consequently, click volume. This is almost certainly because there are more new top position boxes being formed for brand related keywords, and top position boxes tend to increase CTR. Curiously, the AvCPC has been about the same or even slightly lower… but the overall revenue for Google is higher.
This exercise is essentially transferring user clicks from organic to paid search entries.
As many studies have shown, users have problems understanding that the sponsored links are paid advertising, chosen on a different basis to organic links. Informal interviews with users suggest that some do understand that sponsored links are advertising. Others have made the assumption that the coloured background represents preferred answers by Google, and they haven’t noticed the “sponsored links” message in a faint colour.
Anyway, back to the main point of this posting…
Prior to the change, Google’s main effect on affiliates was to only allow one advert per Display URL (a decision made, IIRC, in Jan 2005). This policy means that when you are searching for a book, you find only one advert for the book on Amazon.com, instead of one per affiliate - though Amazon affiliates offering more than a Bridge Page may also be listed. Economics and the nature of the bidding process on Google made sure that this was the highest CTR advert. If it wasn’t, then that affiliate paid over the odds, and pretty soon the advert would be withdrawn.
Where the search query involves a consumer brand name, it is normal for adverts for the brand’s domain to naturally position at the top of the search results. So, if you look up “Expedia” or a search including “Expedia”, you’d expect to see an Expedia (or whatever the brand is) advert, as number 1. It would be most unusual to see a competitor in position 1.
It would also be unusual to see the number 1 advert for a major brand, failing to mention the brand in the advert. Companies can assert their trademark protection to Google, preventing other businesses (including affiliates, if they wish) from using the Trademark in adverts. This is one of the reasons why competitors rarely appear high in results for a brand based search. Some businesses relay on third parties to sell them - so these brands may allow anybody to use the name in adverts - there’s no hard and fast rules here, because it all depends on marketing strategy, which differs between companies even in the same sector.
Outside the USA, brands can assert their trademark to Google, preventing other businesses from publishing adverts on trademark search queries. Note that this is usually allowed only on the searches for the brand specifically. Search for “Acme Corp Accounts Payable” and the trademark is not applied - because the additional text “accounts payable” means this is not a trademark search query.
If Brands and Brand based adverts normally run at position 1, and affiliates are only allowed one advert per display URL, what has been the usual strategy? Well, if you get to position 1, you can decrease the AvCPC (the Average Cost Per Click), because the popularity of the first position increases the impression rate and the CTR. To prevent your affiliate competitors from stealing the position back, the bid is raised, increasing the separation between MaxCPC and AvCPC. In extreme cases, it is possible to bid $100.00, pay $0.01 per click, and lock out competitors completely. In fact, the only serious way to dislodge this kind of activity is when your competitor makes a mistake - such as running out of budget.
By now, you are probably wondering when the Top Position topic is going to come up… Here it is.
AdWords looks as though it is an auction where different participants are juggled to maximise revenue. When you add in the affiliate rule of one advert per Display URL, each Display URL on the page is in fact subject to its own auction, held between the various parties interested in bidding. The advert with the highest CPM takes the spot. Brands tend to have a fairly limited range of appeals, so the messages tend to converge, and you simply end up with the affiliate that happened to first reach the optimal CTR advert taking the position, or possibly using some bidding tricks to deter competitors.
In the long run, you end up with domination of a position by a specific affiliate, for a specific brand keyword. Competitors may have left in place higher bids, in order to try to gain some impressions, but the CTR history, and current revenue stream will lock out economically viable competitors.
This can be pretty strange. On certain brand keywords there will only be one advert, with multiple competing affiliates bidding on it. This increases the AvCPC… Put it like this. Assume that “Engendered Neutrinos” is a trademarked brand. Part of the product range is a piece of freely downloadable software. So “Engendered Neutrinos Download” is a useful keyword. Two affiliates want to use that keyword. So the first bids $0.05, the MinCPC to appear, and after a while the popularity of the search and the high CTR pushes the AvCPC down to $0.01 and the MinCPC down to $0.02. The first affiliate now bids $0.02 and pays $0.01. CTR for something like this is probably, ohh, 10% or so. The CPM revenue for Google is too little to justify a Top Position Box.
The second affiliate enters the market. They are forced to bid at least $0.05 - the initial MinCPC. However, Google will assume that the adverts will get a 2.5% CTR. So in order to appear against the first affiliate, the second will have to increase the bid to about $0.10 just to appear sometimes. To be sure of appearing, bidding something around $0.25 would be more certain. The revenue to Google goes up… because the second affiliate is prepared to pay more to pip the first affiliate, even though there’s only one advert showing.
Eventually one of these affiliates will dominate the position and will probably end up bidding quite a lot in order to prevent their competitor from appearing. Until last week, that was all that happened.
Top Position?
If the top position change is added, this upsets the stable state. For a, perhaps brief, time, the affiliates get the chance to shuffle the pack. This is especially the case where keywords were not under sufficient competition to trigger the previous top position determination. As the new top position box is created, click rates increase, and costs change.
Where this may cause specific and probably short term disruption, is when the anti-competitive affiliate bidding strategy has resulted in high bids. This causes the new top position box to form, and CTR’s and AvCPC’s fluctuate rapidly.
Examples? We’ve got some clients who have had keywords with tolerable CTR, and a small handful of competitors. Bids were pretty high, but the AvCPC was in the $0.20 range. With the formation of the new Top Position box, prices in some markets escalated to more than $20.00 AvCPC. In these cases, I’ve tended to be a bit of a bastard… I’ve dropped my bid so that my client doesn’t appear, but competitors will feel the heat of my bid, forcing up their costs. If they don’t respond quickly, they’ll find a lot of budget being burned for no significant increase in sales.
This will let me burn them out of that keyword while they lick their wounded balance sheets. And then my lower bid will be position 1, and paying a lower AvCPC… Until they come back and start cranking their bid. Oh, the games to play on Google AdWords bidding strategy.
Of course, if there is already a top position box, and it is already dominated by a competitor, then you won’t have the opportunity to dislodge them.
Other Stuff
We’re running an experiment to detect the new CPM boundary to form a top position box… expect results in a week or so, unless I find something commercially advantageous, of course ;)
Summary
Editorial Policies affect bidding strategies.
The old strategy to lock out a competitor can fail when a new top position box is formed - causing massively increased costs. But this can be used to economically damage a competitor, being aware that you don’t want to let them build a good CTR history - because that will discount their AvCPC, as normal.
Newly formed top position boxes can dramatically increase click volumes in some markets. Now we’re almost a week from the introduction, if you haven’t been active in competing before, you need to get active immediately… Many of the higher volume keywords will already have established enough of a CTR history to lock in a new competitor at high position.
The Top Position change may cause some Internet Marketing Managers to revisit policies and contracts for paid search brand keyword usage by affiliates.
Automated bidding strategy tools developed before this policy (IOW, pretty much everything on the market now), is likely to have some difficulties. These tools may not raise the bid highly enough to form a top position box, or may have used defensive bidding techniques resulting in higher than normal paid prices. Check your bid automation is acting sensibly and taking advantage of the new opportunity.
