Apr 202009

Rational vs Irrational Behavior in PPC

Does it help you, or hurt you when your competitors behave irrationally?

At first blush, the answer appears to be: you're always better off when your competitors behave foolishly, but in PPC it's a bit more complicated than that.

Years ago we helped build-out a PPC program for a small company that sold flower bulbs. They had a terrific selection, really high quality products and very competitive prices. Despite all these advantages, we couldn't afford to get their ads to the top position on the page because another company always had the top PPC spot. Whether you searched for "flower bulbs", "daffodil bulbs", "tulip bulbs", "dahlia bulbs", whatever, this other company's ad was at the top of the page. That company, however, sold light bulbs!!!

Now this is an extreme example, and indeed, in this case these companies aren't even competitors, really; but for a while there they were competing for the same traffic. Indeed, their ad copy did not make it clear that they sold light bulbs, hence their CTR was probably quite strong.

The question is: does the light bulb company's irrational ad buying actually hurt the flower bulb company? Perhaps not. Certainly none of the folks who intended to buy tulip bulbs online will have satisfied their demand by clicking on that other link. What happens to the traffic after that? They hit the "back" button and choose a different link. But will they choose another sponsored link, or will the previous experience sour their perception of the paid ads?

If 100% of the traffic bounced off their site and moved on to other sponsored listings, a pretty good argument could be made that the irrational ad buyer hurts themselves with no consequences to the other competitors in the space. If, on the other hand some of the traffic is "lost" to the sponsored links, perhaps damage has been done, particularly to those advertisers whose organic listing doesn't make it to page 1 on that keyword.

Think of traffic on a given search term as comprised of several parts which vary in size:

  1. Those who are willing to buy online if they find what they want
  2. Those who are willing to buy offline, but are interested in researching products online
  3. Those who are just kicking tires and have no intention of buying anything
  4. Those who were looking for something completely different and only clicked on an ad because they didn't read the ad copy before clicking. Eg: search term "wallpaper", user looking for a wallpaper desktop image, retailer selling wallpaper for...walls.

Most online retailers really only care about what happens to that first piece of the traffic, and would love for the other folks to click elsewhere.

It seems to me that with each click on a sponsored listing where the offer is not competitive a small fraction of the valuable traffic is captured by the extravagant spender, the rest bounces to the next click which is more likely to go to a natural listing with each failed landing. That's great for those with strong organic ranking, but stinks for the rest.

I've long predicted (and at some point my prediction may come true) that as more and more companies practice rational PPC advertising, the ordering of ads on the page will very closely track the sales dollars per click each company is able to generate. The higher the sales dollars per click the more a company can afford to pay. The search game will essentially be "won" KW by KW based on which company best satisfies the demand of the consumers.

By and large, this will be a measure of selection, price and ease of shopping. Granted, some firms may have more aggressive marketing goals and may be willing to lose money to gain share for a time, and some firms may have lower COGs and more margin to play with and can hence be more aggressive than SPC might suggest. But, these will be relatively small effects once everyone learns to play the PPC game comprehensively and well.

But this hasn't happened. There are still many irrational players in the space bidding far more for some terms than makes any sense from an ROI perspective, and bidding too little or having inadequate coverage on the rest of their list. The incompetent and irrational may hurt themselves primarily, but there's no question that in markets and on KW where the sponsored listings are dominated by folks who are paying more than they can afford, the consequences are also borne by those pushed off the page.

It's strange to say, but retailers with competitive offerings may actually benefit by having their competitors bid wisely rather than foolishly. Of course, if the competition spends themselves into Chapter 7, that could be helpful, but short of that a rational marketplace may be the best for all parties concerned.



8 Responses to "Rational vs Irrational Behavior in PPC"
Marc Adelman says:
George, Interesting post. A level playing field I think always favors the long term business goals of all competitors. An additional internal factor that leads to the tipping of the balance within an industry is PPC campaigns running on monthly budgets. Many times theses companies have no idea how much they are overbidding for their core KWs. They have their pretty and concise budget and Management says , "Hey we are the light bulb king! We need to be in the 1st position for every possible search term with bulb no matter what" - so they set the bid for BULB in broad for $5.00. This is no over exaggeration! I have seen worse. This in turn creates situations where the competition is forced to bid more for decent or top placement and many times cannot. Running PPC campaigns without a budget and instead uncapped and aligned with one or several KPI goals (Cost over Sales, ROAS, CPA as you have many times mentioned) prevents this gross overvaluing and paying for competitive KWs and keeps the industry within a range of spend that promotes long term growth, sustainability, and profit within an industry.
Absolutely, Marc, and shameless agencies who promote the value of the PPC Buying Cycle in the face of all evidence against it play a role here as well. We actually reached out to the light bulb company above and pointed out that their agency was flushing money down the toilet. They appreciated the call, but at the end of the day felt so badly used by that agency that they swore off PPC agencies as a class. One reason we provide so much info on how PPC works is we feel like irrational behavior by our competitors hurts us as well. The more companies are taken for a ride by unscrupulous SEM firms the less likely they are to trust any agency.
Jennifer says:
Question for you that is semi-related to this topic: We've noticed some of our competition advertising multiple sites for a single keyword. In the past, this has been in violation of Google's policy. However, when I approached our Google reps about this situation, they told us that as long as the product offering on each of the sites didn't overlap by more than 80%, this is permissible. 1.) Have you noticed anyone in the retail or other industries doing this? 2.) How do you think this will effect the issue of rational vs. irrational bidding that you discuss above?
Oh what a great question, Jennifer! I may have to write a follow up post as this is an important issue we haven't yet discussed. From what we've seen, Google has definitely relaxed its policy in this regard. I think the policy has always been more lenient with regard to companies with a real history who are acquired by competitors, as opposed to companies that essentially create a web alter-ego so that they can have "two hooks in the water". To me, that distinction makes some sense: customers develop loyalties to certain brands, and part of what you're buying when you acquire a competitor is that loyal customer base and brand recognition. We have had clients in both categories. In our experience it is almost universally true that having "two hooks" doesn't double your take; in fact, it seems to roughly double a retailers costs while adding nothing to the top line sales. From the consumer perspective this makes sense: some fraction of folks plan to shop around, particularly for higher ticket purchases. In those cases bringing the same customer to essentially the same product selection at the same prices seems to just annoy folks. "No, I didn't want that, if I did I'd have bought it at the other place." "Dominating the Page" seems attractive from the corner office perspective, but I'm not sure it makes sense in terms of ROI. Folks who've had success at this are attacking different market segments: the high-end is one company, the low-end is the other. Even then, this seems more promising in theory than in practice.
What I have been led to believe by a SEO who sits next to me is that the PPC used early in the life of a website can help it to climb in ranking.
Atul, thanks for your comment Interesting notion. The engine's maintain that paid in-bound links play no role in organic rankings. Is your colleague saying they're wrong? Certainly it's hard to get legitimate inbound links if no one knows your site exists, and paying for traffic is a way to spread the word. Ultimately if the traffic you bring in isn't purchasing enough to pay for the advertising it means they're not finding what they want. Hard to imagine them linking to your site en masse. I'm not an SEO expert, so I'd love to hear the counter argument.
SEO India says:
there is no relation of SEO rankings with PPC by any mean, otherwise we could see some common results for any keywords in both paid listing and organic listing. I am disagree with Amit.


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[...] George Michie discusses the issue of competitor behavior and CTR. Often, you can benefit from your competitor behaving irrationally, but the tables may have turned in search marketing so that you're left hoping your competitor practices rational PPC tactics. [...]

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