Google AdWords, Agencies, GAPs – A Future?

Published on June 20th, 2010 by Jeremy Chatfield

Google is probably evolving its’ thinking about end users and agencies. If I’m right, it sees a shake up in the way that AdWords is sold, supported and managed, and has an implication for the future profit potential of Google. It’s quite an interesting future, if I’m right, but to get there, we need a bit of history and context.

AdWords Is An Auction

Basically, AdWords is an auction for space, on each keyword. The more money your advert returns to Google, the more highly the advert will be ranked. If your advert is sufficiently disappointing to users, or misleading, or violates one of a bunch of rules, no amount of money will keep the advert in play. What you pay is determined by the value of the advert below you. If your competitors aren’t willing to pay a lot, you don’t pay a lot. If your advert is outrageously good, then you may end up paying less per click to beat your competitors (you’re renting the space, not each advert).

One of the basic rules of auctions, especially an auction where your payment is determined by the bidders below you, is that the more bidders there are, the higher the value of the auction to the auctioneer. So, Broad Match, the default choice for AdWords, allows Google to recruit as many advertisers to the auction as will reasonably be satisfied. And Google effectively runs an auction for each space on the screen – so increasing the pool of bidders has a large impact on the whole page of results for a keyword.

Another key element for Google and advertisers is satisfaction. If advertisers get dragged into auctions for searches that they don’t want their advert to be shown on, they’ll get some clicks, and those’ll probably be low quality clicks – poor conversions. On the other hand, users mis-key, so a certain amount of Broad Matching activity is useful – it helps you find miskeyed stuff and search queries that you hadn’t considered. But, overall, if the quality of Broad Match is bad, then you’re likely to bid lower on Broad Match, or switch to an Exact Match strategy. So there’s a pressure on Google to keep Broad Match to some reasonable matches, rather than just anything, all the time (that doesn’t mean that a few wild excursions are impossible, just less likely).

A Beautiful Mind versus Broad Match

AdWords can control the use of Exact Match to evade using Broad Match, to some extent, by telling you that search volumes are too small to match your keyword. That’s kind of true – there is a computational cost to managing a huge number of exact matches with a low likelihood of being searched for. So there’s a way to make sure that some quantity of Broad Match stays in play, without everyone heading for Exact Match. The ratio is probably determined using something derived from the Nash Equilibrium – you’ve seen that film “A Beautiful Mind”? That’s the John Nash I’m talking about.

OK, so what’s match types and search queries and auctions got to do with the Google accreditation and Agencies? I think they are intimately bound together, but through an unexpected connection… small advertisers.

Small Advertisers – Welcome To Frustration City

Small advertisers tend to have low budgets. They can’t take part in all auctions for all relevant keywords. The smartest ones use exact match, and geotargeting and the other tools – but you need to have invested time and effort to learn those, which often has a significant cost for small businesses. There’s a lot of users that just don’t understand AdWords, and don’t have the time to invest in learning.

Looking at examples I’ve handled in the AdWords Help Forum… They bid globally for a business with a 20 mile service radius. Their adverts are rubbish – describing their place of business or their name, but not what they do. Their landing pages fail to have a call to action. These advertisers tend to have a bad time with AdWords. They may abandon accounts and start again – causing Google to suspend the account because it looks like a scammer. These small advertisers complain, in numbers. They do so on the AdWords Help Forum, in their thousands.

Abandoned AdWords Users

So far, Google hasn’t really addressed the needs for these users. There was an attempt to create a Starter Edition, but as a cure, it was worse than the disease, and pushed users in directions that were less likely to lead to success, not more. The Starter Edition is gone. It didn’t solve the problem. But there’s still lots of dissatisfied users, asking for help in public.

Marketeers will recognise a classic problem here. Small advertisers, low budgets, can’t afford the services of a big agency. Larger agencies like to have clients who spend upwards of $1000/month – it’s just not cost effective for either party (agency or client) to really consider the $100/month budget client. But these smaller advertisers are present in vast numbers.

AdWords Auctions and the Small Business

What do we know about the auction? The yield of the auction depends on the count of bidders, to a substantial degree. If we can find a way to prevent small advertisers from defecting, then their low value contribution should yield a higher value contribution from larger advertisers. By taking part in a fraction of the auctions (to fit the budget) this mass of small advertisers pushes up the Average Cost Per Click. It’s in Google’s interests to make sure these small advertisers participate, and get some value.

But they’re expensive to create, these small accounts, and low yield for an agency. The Google accredited AdWords consultants and agencies out there, well, they could service these guys, but one and two person agencies tend not be supported by software – effective AdWords management software is pretty expensive. So the very small advertiser tends to be unaddressed, and tends to be dissatisfied – but Google needs them, in order to maximise returns from the largest advertisers.

AdWords – Fixing The Small Advertiser Problem

We can square this circle and resolve the conundrum, I think. What about if Google creates a support team, in a low labour cost country? You pay a little more to have the account set up, and Google uses its’ massive automation to provide a moderately successful AdWords account (statistically, some will be rubbish and some will be awesome, but on the whole, they will barely return a profit for Google). This mass of small advertisers will create a pressure on the auction, pushing up the major advertisers a few cents – on billions of clicks. That’s where the value lies.

By providing more support for small advertisers, and reducing defection, Google makes only a small amount of profit. Google can point to this near-philanthropic effort and everyone will feel good about the multi-billion behemoth doing good. But it’s more clever than that. The support for the small advertisers creates an uplift in the auction, delivering millions of dollars to billions of dollars per year, from larger businesses.

AdWords Agency Impact

But if there’s a low cost way to get your account set up and managed, what happens to the small AdWords agency? Gradually deprived of small businesses with problems to solve, these guys will be pushed out of the market – squeezed between Google below, and larger agencies above.

The new Google Marketplace appears optimised to allow the largest agencies to appear highly ranked – so there’s a force for consolidation amongst small and large agencies.

And that would solve another problem. The deceptive agencies that phone up and say they have a special arrangement with Google that lets them place companies on page 1 of search results. The staff who make these calls have no idea whether they are selling SEO or PPC – they just know there’s a special relationship and you can buy your way to the top.

That’s a brand problem from Google. It causes a number of small businesses to believe that Google’s organic results are affected by payments – which is neither obviously true (indirectly it is true – but the money paid doesn’t go to Google) nor helpful (Google benefits from appearing to be uninfluenced by third party money – a fair and impartial judge). By and large, these less-than-entirely-ethical agencies will also be squeezed. That helps Google, and in turn, encourages more advertisers and discourages spend on SEO link building (much of which is wasted after about six weeks, anyway – and the cross contamination means that on informational searches, where there is no commercial intent, Google can start to deliver better informational and less commercial content).

When will this consolidation happen? I have no idea. I’m not well plugged in to Google AdWords insiders these days. If I were, I probably couldn’t write about this, as it’d probably be part of an NDA. But I used to be well connected, and I can guess from observing recruitment (I’ve seen Google advertising for people with knowledge of the Nash Equilibrium, for example), and from thinking about auctions, and marketing… I could be wrong, of course. I’m not always right, but then so few people are. :)

AdWords Agency Consolidation

I’ll guess it’ll happen in the next year. Recessions are a good time to think about and come up with new services to extract more money. We’ve already seen experiments in some countries where Google offered to set up small accounts – in the UK, for example.

It takes a large business, like Google, time to take on and train the staff, once they’ve done the test marketing… So, I’d expect something within the next eighteen months. That’s about enough time to hire an army of third world workers, train them, and develop the supporting websites and collateral, including a physical mail, TV and phone campaign… If you aren’t already planning how to grow or merge your small AdWords agency, this may be a good time to put that consideration back into play.

This would also be a strong play to counter the consolidation of Bing and Yahoo search results, due to come on the agenda, shortly…