The Math Behind Google’s Latest Move…

Ok, so Danny Sullivan has written a nice post on Google’s latest decision in certain markets to remove the Agency rebate. The real reason behind this move, in my opinion, is that it will increase relevancy.

I personally have a problem with any kickbacks/rebates that are given to advertisers in an auction driven marketplace, as those who receive these rebates effectively have an edge over other advertisers – which is not fair play. Many agencies who receive these rebates, actually refund the costs directly back to the advertiser, or factor it into their bid prices (i.e. increase their prices by up to 10% more as they receive this discount back).

So, here’s the math as to why Google is in the process of removing the agency discount, and why it’s a relevancy issue:

Let’s play our a scenario where 8 advertisers are competing for position on the front page of Google. Let’s also assume that their sites convert equally and they have the same product, therefore the same margins and by chance, they also have the same relative (to position) conversion rate on their site for each position and their max CPC starts at $1 . Let’s also assume that the price that they pay in the positions just below is also the maximum profitable price that they are willing to pay. Due to the quality scores of each advertiser, their ranking & CPC are determined as follows:

1. Advertiser A – $1
2. Advertiser B – $0.99
3. Advertiser C – $0.97
4. Advertiser D – $0.96
5. Advertiser E – $0.95
6. Advertiser F – $0.94
7. Advertiser G – $0.93
8. Advertiser H – $0.92

So, if we assume for a minute that the positions indicated above are ranked in terms of user relevance, then this represents a perfect win-win scenario for Google where all advertisers are ranked both upon their maximum price & user relevancy.

Ok, now if all of a sudden, Advertiser H was given a 10% rebate, he could then effectively offer a Max CPC of $1.11 . This result in the following re-ordering:

1. Advertiser H – $1.01
2. Advertiser A – $1.00
3. Advertiser B – $0.99
4. Advertiser C – $0.98
5. Advertiser D – $0.97
6. Advertiser E – $0.96
7. Advertiser F – $0.95
8. Advertiser G – $0.94

So, what has now occured is that the least relevant advert on a given keyword now receives top position, because of the rebate, even though Google themselves are not earning a higher CPC for that position. I realise this is rather simplistic and that there are other variables not mentioned, but the effect is even more pronounced when you expand it into the real world marketplace (you’ll just have to take my word for it – I have two actuaries in incuBeta ).

Google is not trying to launch an attack on Media Buyers & Search Agencies – what they’re trying to do is remain true to their users & their ranking algorithms and remove any form of bias to any advertiser. The sooner that Media Agencies come to terms with the fact that Google is full of mathemagicians…the sooner they will feel more comfortable with their policies.

I understand that it’s contradictory in some ways, as we look at China, but in essence China is such a different market and from our experiments with the ranking algorithm in this market, it’s being engineered in a slightly different way (or so we think!).

Obviously, as a performance marketing company, we welcome the removal of rebates to level the playing fields, as we do believe that we’ve been at a disadvantage by not receiving the rebates. Our business model is also geared around maximising spend toward a certain conversion metric, not brand marketing or managing client PPC spend as an agency or in-house team would. We also don’t rely on rebates and branded terms to make a campaign “look good” to a client, and in the process just pull wool over their eyes as many agencies and in-house teams do.

Our business is focused on leveraging technology and people to create systems that allow for us to rank high on well researched, niche keyword terms that our clients are not on, or are not ranked as high as they could be. Sure, it makes some agencies & in-house teams concerned and insecure, but the really advanced agencies & in-house teams never have a problem working with us and often give us valued support, because we have a common goal – increasing revenues for the client and maintaining costs to a profitable level for all parties. The removal of rebates will further pressurize the inefficient players in the market, which also benefits all parties concerned.

In closing, I believe it’s just good business for Google to focus on keeping the integrity of their ranking algorithms in line with what the end user wants and in making sure that they keep coming back.

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