Aug 122009

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.


11 Responses to "PPC: The Game Favors Discounters"
Marc Adelman says:
George, Online marketing is still in its infancy. If we fast forward 20 years and look back I think we will realize that the first 10 - 15 years of e-commerce really resembled a virtual Wild West. For many reasons all converging at once - this Wild West atmosphere has allowed people to veer from tradition recipes of business success, and instead has empowered people to make fortunes off of vaporous tricks and the good ol' bait and switch. What really puts this into perspective is the following imaginary exercise. Imagine that a website is an actual brick and mortar storefront. As you are walking down the street you see a sign "Low Low Prices on TVs". The store is called Jack's Low Low Price Shack. You walk through the door thinking, "Hey - maybe I can get a great deal here." As you walk in, you come to a hallway, and at the end of the hallway is another sign, "Walk through this door for the best deals on a TV". You walk through that door and to your surprise you are in Best Buy, not Jack's Low Low Price Shack. As you walk into Best Buy, the cashier from Best Buy hands this guy standing behind you a few bucks. Turns out that guy is none other then "Jack" from Jack's Low Low Price Shack. He is actually being payed for you walking though two doors and a hallway with a sign. He didn't sell you anything. He didn't provide you with any noticeable service. Could you ever imagine a business like this thriving in the brick and mortar world. NO WAY - NEVER! But... that is what has happened in the Wild West era of online marketing. This type of business cannot sustain - won't sustain, and as you stated perfectly, "the days of using paid search as a cash machine are nearing their end". I whole heartedly agree.
Great metaphor, Marc. Price pressure is not new online, and it could be that as consumer confidence improves things like reputation, service, product info, return policies, etc will become more important again. Right now, we seem to be in a race to the bottom in terms of pricing, similar to the airline industry with similar impacts on the bottom line.
Greg Moore says:
George, The mass merchants of television are the networks, and their shows get the most views. Mad Men may be critically acclaimed, but apparently can't make it on NBC. Since higher end merchants are at a disadvantage when using a mass market medium like AdWords, can they be like Mad Men and find another channel? What options do you like to consider for higher end clients who increasingly are being priced out of standard PPC? - Greg
Greg, thanks for your thought-provoking analogy. Search is demand responsive. The volume of advertising that high-end merchants can do cost effectively has always been limited by the demand, so maybe this is the way it should be. To the extent that search users get more sophisticated all the time, any unnatural limits imposed by the current incentives may resolve themselves in one respect: Users who search for "outdoor furniture" now who are actually interested in buying high-end teak Adirondack chairs may over time change their search behavior to generate results more suited to what they actually seek. Studies show the average number of words in search strings has increased over time. I don't think will be the answer, but I've been wrong every time I've tried to predict the future :-)
Ron says:
"But… that is what has happened in the Wild West era of online marketing. This type of business cannot sustain - won’t sustain, and as you stated perfectly, “the days of using paid search as a cash machine are nearing their end”. I whole heartedly agree." Marc's analogy would make the real world a horrible place to shop, but we are talking about a very different campaign structure when an advertiser sets out on the internet (a virtual world). What doesn’t work in reality…does online. I have to disagree that this type of advertising cannot sustain. Everything we see today points toward "paid search" becoming broader and more sophisticated. Web 3.0 will include a combination of informed consumers via “Socialnomics” and USER CONTENT DRIVEN paid search. With more and more companies turning to the web to sell their products or services, they can’t ALL rely on organic results to drive traffic to their sites. There is just too many of them. They must partake in the complex and misunderstood campaign structure of paid search results across many networks.
Ron, thanks for your comment. I don't think anyone is saying PPC advertising is unsustainable, I think Marc's simply saying the race to the bottom in pricing isn't sustainable. Marc?
Marc Adelman says:
Ron, My analogy may have been too general for the sake of imagery, I think. George hit it on the nail, in that I was talking about the bait & switch competitors that have plagued the sponsored link game since day 1. These merchants are overaggressive in price discount in their ads. Rarely though, does a customer leave their checkout with that price as a total. Actually many times they don't even have the product in stock. The ones that really grind my gears are the ones that post a low price and actually redirect you to AMAZON. This can't happen on Amazon anymore - thanks for waking up Amazon, but does happen elsewhere. To me, internet business has allowed for a free for all for scams and misleading business practices. Scams are all dated. One can only get away with it for so long. I'm not saying one won't make money. But there is a difference in the amount of money one can make from a scam and a sustainable - reputable business. In no way am I talking generally about paid search. Just bad practices that i can't believe have high sustainable conversion rates on the other side.
Ron says:
Marc, Thanks for taking the time to clear up the misunderstanding. Turns out I agree with you. But… Could it be that some advertisers experience something we haven’t thought of yet? Bait and switchers may have found the Golden Ticket of ROI. Let’s say Amazon sets up a bait and switch through a third party and gets a shopper onto their website. AMAZON is a big boy with lots of products. In fact, if you are shopping for something, they probably have it. As most marketers are aware, many people shop without a shopping list, and when that happens they buy more than they need or necessarily want (this is exactly what supermarkets love btw). But back to Amazon. According to Alexa, has approximately 6-7 pages to convince a user to buy something. If a user doesn’t buy something, the user is undoubtedly partaking in a Brand Awareness campaign by Amazon. Maybe they didn’t know about Kindle before this visit, or that they can download MP3s from the site. Did the user click an advertisement from a page on Amazon? If so, Amazon just got paid for that click. This time, my point is focused on UBERsites, who can get away with the scheme advertising we hate. Sites like Amazon know that all they need to do is get a user visiting. By the time a user clicks a bait and switch ad and dives 6 pages in (at 1 min/page), they’ve already forgotten what they were looking for in the first place. Now they are mesmerized by their newly found retail opportunities. Maybe they call a friend and tell them about Kindle. Amazon wins. Where can we find this in the real world? Ever been to Costco? Admittedly, Costco is like my Disneyland. I enter the store believing that no matter what I buy, I am going to save money, but we know that isn’t always the case. Sometimes they are not the low price leader, but I’ve just spent an hour of my day walking through every isle – drooling over all the awesome products that I don’t need or normally want. And…sometimes I buy. As online shopping transforms the web into a 3.0 state, I believe we will see users who are more informed but will be looking for the best deal as well. Unfortunately they’ll always be intrigued by that little ad that says “Your product at this $$$.” So unless advertising laws tighten up on this type of promotion, we might be surprised how long it lasts.


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