At RKG we sometimes pine for the good ole days of Yahoo/Overture and the flat account structure. Each keyword had it's own title and copy block, we didn't have to play games with breaking up ad groups to change copy on different collections of keywords...ah simplicity. Granted, that structure is the ONLY thing we missed about the pre-Panama platform... but I digress.
The adgroup structure makes a great deal of sense for the engines: much less data to store, much more efficient performance, and it even carries the side benefit of helping retailers "organize" their campaign. In fact, in the content advertising realm, adgroup structure is important to performance and we recommend paying attention to the Google/Yahoo recommendations.
The problem is rigid hierarchical schemes don't work very well in search advertising. It turns out that keywords often have many different attributes. Classifications might run along the lines of product category and subcategory, but also manufacturer, material-type, holiday association, sku specific vs general, gender, etc. Forcing all terms into neat campaigns and AdGroups limits flexibility.
Instead, we parse groups by the whole collection of attributes, grouping only those terms that share all attributes, not just two of them as campaign - adgroup structure would suggest.
Why is that an advantage? It allows us to make copy changes across any dimension or combination of dimensions without having to break up adgroups and recombine them later. Having a big sale on "Metal widgets"? Great, done. Oh, it's only on "Acme Metal Widgets?", no problem done. Need all the "Apex Automotive Seat Cover" terms going to a separate landing page, no worries. Because each combination is clustered as atomically as we could ever want we spend less time creating and combining groups.
What's the drawback? For us the only drawbacks are that periodically the engines tell our clients that we "don't use adgroups correctly". Our clients occasionally complain that they can't find things easily in our accounts because there might be thirty different ad groups related to "Women's shorts" and they don't know which one is hiding a particular keyword.
Those drawbacks don't really impact us in our management. The combination of APIs and Adwords Editor make the Engine User Interfaces almost irrelevant, and as we provide full service management, while clients are welcomed to poke around in the account, they certainly shouldn't need to do so.
More importantly, from an analysis perspective, campaigns and adgroups play no critical role in our system. We database everything on our side, so analyzing data by product category, manufacturer, color, gender or some combination thereof is a breeze.
We'd make the case that tying the classification schemes to the campaigns and adgroups is problematic on many levels, particularly if performance analysis -- and heaven forbid bidding -- are tied to that structure. What happens to these analyses and bids if you have to split or combine adgroups to get promotional copy tied to the right terms? Bad business.
While campaigns and adgroups can provide small programs with some sort of organizational framework, a large, sophisticated program needs to be much more flexible and much less brittle than the two-tiered hierarchy allows. The data: costs, sales, keyword classifications, etc have to live on your servers to get the maximum analytical benefit.
Having to explain what we're up to to each new engine account rep is annoying, but the performance gains are worth it.