PPC: The Game Favors Discounters
Advertising tactics must respond to the structural realities of the medium. Those structural realities are a product of how ads are purchased and other unique rules of the game. The paid search game has a distinct structural bias towards mass merchants.
“Bait and Switch”, “Loss Leader”, and other tried and true tactics make sense when advertising is bought by the impression. Consider the print ad: the advertiser pays the same rate whether readers respond to the ad or not. The goal of the print ad is therefore simple: get as many people to come to the store as possible. The more people who walk in the door the more sales opportunities the more sales generated by the ad. The quality of the traffic is largely irrelevant to the advertiser; and the publisher cares neither about the quality nor quantity of traffic.
A cost per click model creates different incentives and requires different management tactics. Suppose instead of buying a print ad in the newspaper the advertiser pays based on the number of people who walk through the door. The incentive structure has now flipped. It is the publisher who is now concerned about maximizing the quantity of traffic driven, and the advertiser who starts being concerned about quality as much as quantity. “If I’m paying $5 to get someone to walk through the door, I don’t want them bringing me a busload of traffic from the soup kitchen!”
Paying for visits, or mailing catalogs, requires advertisers to “qualify” traffic. More is not always better.
“Quality” has a different meaning for Google than it does for advertisers.
Google defines the Quality of an ad largely by its anticipated Click-Through-Rate “CTR”. However, the advertiser defines the quality of the traffic driven by each ad as a product of its conversion rate and the value of the conversion events: margin dollars per order, average order size, or lead value.
It’s important to recognize that the very strategies that are often most effective for boosting CTR often have the opposite impact on the quality of the traffic.
If Acme sells high quality, high-end office furniture ad copy with a tag line: “Ergonomic Desk Chairs from $295″ might be in its best interest from an ROI perspective. “Low low prices and Deep Discounts” would generate far more traffic, but the users would be sorely disappointed when they got to the site, torpedoing the value of the traffic. In head-to-head tests, we’ve usually found that truth in advertising generates better ROI, and indeed, trumpeting discounts is often less cost-effective all-in than not mentioning discounts. This can even be true for mass merchants with short-term offers.
However, mass merchants who can pitch chairs “As low as $45 PLUS Free Shipping” will generate higher CTR and lower CPCs for the same traffic, and if their conversion rates are high enough they may be able to bid as much or more than the higher-end merchant.
4 or 5 years ago there was room on page 1 for a spectrum of merchants to present their wares, but with growth both in the number of online retailers, their adoption of PPC and the increasing sophistication of their PPC programs, the higher end merchants have been pushed off the page on many if not most high traffic category and sub-category terms.
Certainly the higher end merchants can still succeed on lower traffic, more product specific, or appropriately modified category and sub-category terms but even there “low price guarantee” and promotions carry the day.
That mass merchants win the eyeballs of the mass audiences is neither surprising, nor problematic, but the margin-destroying pressure exerted by promotions and the rewards associated through QS make it harder and harder to make search profitable.
Inevitable? Absolutely, the cost of advertising always catches-up to the value, but I’d argue that the days of using paid search as a cash machine are nearing their end.