Vinny Lingham's Blog

Google now offers a secondary method of bidding, called Preferred Bidding – this will add additional liquidity to the Google Adwords marketplace and allow merchants more control over what they would like their final CPC to be. My view is to stay with the existing bidding model, until more research is done on this new option and the implications of it on advertisers.

So, if you haven’t heard by now, AOL is receiving their own version of Google Adwords (Private Label deal).

I’m not going to rehash the background and deal info, referenced at SearchEngineLand, but instead, I’ll try to explain what I see the market impact as being.

I’ve long argued the point that we should be able to price keyword by partner on all the major search engines, as they all have quite different conversion rates and “Not every click is created equally”, to paraphrase. The AOL deal has forced Google to make this move, and I think it will probably hurt their margin numbers and not just their revenues. Overall, it’s probably close to a zero sum gain as the money will flow to AOL, but their cut will just reduce. I haven’t done the math, but they might be just slightly worse off on revenues, but definitely down on margin.

Also, this impact will hurt many of Google’s partner sites that relied on high conversions from AOL to “slip” clicks through the door at higher than market value (respective earning or value per click), because of the fact that marketers cannot price each partner differently.

This is quite a complicated post, so please bear with me – I’ll try to explain this as simply as possible.

Currently, when buying Adwords ads, you pay a single price for a click & keyword that goes to Google’s distribution network.

For example (and I’m using hypothetical, BUT REALISTIC numbers here), let’s say that a keyword received 100 clicks and the breakdown by partner is as follows:

25 Clicks from AOL – 5 Conversions
50 Clicks from Google – 4 Conversions
25 Clicks from Google Partners – 1 Conversion

Total Clicks = 100 x CPC of 25c = $25 in costs
Total Conversions = 10 divided by $25 in costs, leaves us with a $2.50 CPA (Cost Per Acquisition)
Assume an average position of 3 and as you can see from above, AOL has the better conversion rate.

Let’s assume that your breakeven point is $2.50 CPA. Now, because Google runs a single blind marketplace, there is no price discrimination, which means that there is cross subsidization of keyword value (you pay an average price for everything, yet some clicks are worth more and others are worth less).

For the record, our logs indicate that AOL has the best conversion rate across all Google partners, and this simple means that if there is a separate marketplace for AOL, that prices across the Google Adwords network (especially direct) should fall, IN THEORY (see conclusions).

Now, let’s assume that we removed the AOL numbers:

50 Clicks from Google – 4 Conversions
25 Clicks from Google Partners – 1 Conversion
25c CPC x 75 Clicks / 5 conversions = $3.75 CPA

By AOL moving out of the marketplace, this would effectively mean that the remaining traffic would become too expensive, because AOL would not be cross subsidizing it (and obviously, they know this already, and that’s why they want their own marketplace). This would mean that prices would drop in order to offset the drop in traffic quality.

What would this mean for AOL?

$2.50 CPA x 5 Conversions = $12.50 / 25 Clicks = 50c CPC – almost DOUBLE what Google was raking in for them by cross subsidizing, is what the merchant would be willing to pay direct on AOL, because of the higher conversion rate.

Now, here are the possible conclusions vis a vis Google CPC’s:

1. Google CPC’s will drop as marketers move their spend directly onto AOL and adjust ROI’s according on Google. This will impact Google’s financials, as they will have to pay out a lot more money to AOL.

2. Google CPC’s will increase as dumb money floods the market because marketers are either too lazy or overworked to load AOL campaigns (highly unlikely in the long term) and instead they make it more profitable for Google to show Adwords direct ads for AOL, than AOL marketplace ads. I doubt this would occur though, but it’s a possibility.

3. Google CPC remain unchanged as AOL take-up rates are too low to impact the overall conversion number in the short to medium term.

So, logically speaking, by removing the “bane of mankind” *according to me* (Cross Subsidization) from the Adwords system, we as marketers will be able to align ourselves far more closely with the value per click.

Where do I get this insight from? Well, as an affiliate marketer, we have to watch the earnings per click very closely. EPC is a key metric and we are also able to distinguish (using our proprietary technology) the different conversion rates and therefore effective EPC’s per network partner for all the search engines. This data allows us to derive very accurate statistical models and also understand how the market is interpreted (well, as best as possible) by other players.

Every cent we spend is our own, so we have to ensure that we’re as closely aligned to value per click or EPC as possible, and therefore we’re very excited about the AOL prospects, but realise equally that it’s a lot of work.

I think this is a great move by Google and I applaud them. They’ve thrown the gauntlet down to the other search engines, and let’s see how they respond!

We have just discovered that Google has released impression search statistics in their accounts today.

How does Impression Share reflect on my campaign’s performance?

Impression share is a metric available at the campaign and account level for search.

* Campaign: If an advertiser has more than one campaign competing in the same target market, the resulting impression share for any one campaign won’t be penalized if it loses an impression opportunity to another campaign from within the same account.
For example, let’s say Campaign A and Campaign B both belong in the same account. Out of the ten potential impressions, Campaign A shows twice, and Campaign B shows five times. A competitor takes the remaining three impressions . A campaign-level report will show an impression share of 40% for Campaign A (2/(2+3)) and 63% for Campaign B (5/(5+3)).
You can see that the impressions Campaign A lost to Campaign B is not factored in to the denominator when we calculate Campaign A’s impression share. This example illustrates that it is a lost opportunity for your campaign only when the competitor wins the remaining potential impressions.
* Account: Reports at this level will not penalize your impression share from the competition across all your campaigns.
Let’s take the same example from above. An account-level report would show an impression share of 70% ((2+5)/(7+3)) for the entire account. If you look at the denominator, you can see we factor in only the impressions you’ve won across all your campaigns (Campaign A and Campaign B) plus the opportunities that were lost to outside competition.

This will (with further understanding) certainly help clarify if Search Affiliates do better job than Search Agencies. There has always been uncertainty from the merchant side, with this data – there can definitely be closer relationships between both Search Affiliates & Search Agencies (or worse, who knows!).

My belief is that through the use of Search Affiliates (direct linking), we will now be able to quantify the benefit that we offer to a larger range of merchants, than our existing clients. The ultimate aim for any merchant will be to get 100% impression share, and given the sheer volumes of keywords and variables (bids x keywords x positions and then some) that are out there, I don’t think it’s possible for just a single company to be able to achieve this. Search Affiliates will be an even more vital part of the Search Marketing ecosystem going forward!

Kudos to Google on this move and providing the market with more information – I think it’s a very positive move especially for Search Affiliates!

Ok guys – now seriously! I’ve had a number of people emailing me, not sure if my previous post on Google dropping CPC is true or not!

For those of you who do NOT read the comments section, IT WAS A JOKE! Google is NOT dropping CPC!

Other pranks by Google were these ones.

News just hit the wire that effective immediately, Google will no longer accept Cost Per Click (CPC) bids. Apparently, this is in anticipation of more branding dollars moving online and Google will still utilize Clickthrough rates in determining Quality Score, but will charge for ads on a CPM (Cost per Thousand Impression) basis.
My sources tell me that the new CPM rates are expected to earn more effective revenue with advertisers that have low clickthrough rates and also, allow them to embed advertising within the newly acquire YouTube network.

With this change, Google will also be showing image ads on SERP (Search Engine Results Pages), in the form of a 234×60 banner, after the search box. These image ads will start at a $100 CPM rate and bidders can participate from 1 April 2007 (today).

Yahoo have responded to this by announcing that they will continue their CPC policy and remove image ads from the My Yahoo homepage in an effort to promote their search box more prominently.

UPDATE (3 April 2007): THIS WAS AN APRIL FOOLS JOKE – DO NOT TAKE IT SERIOUSLY