AdWords, Declining Click Prices (CPC’s), and Interface Optics: Two Theories

Google’s recent financial results weren’t nearly as bad as the markets seemed to think. By any rational standard, once again they turned in a strong Q4 and strong YOY growth. Earnings were very solid. All they did was miss Wall Street expectations slightly.

If revenues and profits were up sharply — but below expectations — were there any red flags at all?

It appears so. While total paid clicks were up 34% year over year, click prices in the form of average CPC’s were actually down a whopping 8% from the same period in 2010.

Google didn’t provide a breakdown, unfortunately. Did much of that come as a result of the growth in less targeted display advertising? It doesn’t appear so, because network clicks grew more slowly than clicks on Google-owned properties. So the softness is either within Google Search or YouTube or both.

What about search clicks? What about the prices of commercially valuable terms in hospitality, financial services, health, education, and real estate? What is happening now, and financially speaking, what will happen down the road with, the increases in paid local searches? Google doesn’t have to tell us, unfortunately.

There seems little question that the market for paid clicks is showing a bit of pricing vulnerability, in any case.

And what is perhaps doubly red-flaggish about that is that it is occurring in the wake of Google taking a variety of steps to exact higher CPC’s to wring more profit out of the existing traffic to Google Search.

Some search marketers believe that terminology within the interface, default settings, and even certain tools and reports, are intended to “frame” the auction so that a higher bid appears logical in order to achieve your marketing objectives. So with all of that Google intellectual firepower going into making higher bids seem sensible, the financial results indicate that marketers are largely turning up their noses at these bits of subtle persuasion.

Take, for example, the Bid Simulator tool. Personally, I’ve found it useful because it can remind you that currently, your volume could go up more than you think if you raise bids on a keyword — even if your reported average ad position is already high. That is, in part, due to the fact that Quality Score now determines eligibility for as well as position in any given keyword auction. If you have middling to low quality scores on a keyword, a higher bid may increase not only your ad position, but your “eligibility” to be served each and every time a relevant search query is generated by a user.

This projection tool works sensibly in the case of a specific term using a tight match type, such as the phrase match for “buy green barbie”.

It doesn’t work very well at all for broad-matched terms such as the broad match for “ontario place” or “love handles”. That’s because such terms have a huge reach potential (if you’re willing to bid into the stratosphere), but at a very high bid, they achieve that potential only by showing your ad to ludicrously untargeted searchers, and by cannibalizing traffic away from your more specific, well-optimized keywords. In this case, the Bid Simulator becomes relatively uninformative and relatively useless.

The real question I have is: (1) Did Google build things like this on purpose so that novice and lazy advertisers mess up their accounts and bid higher to gain added impression share, willy-nilly?; or (2) Did this just not occur to them at all? Did they just throw up the tool without any of this occurring to them?

Both possibilities are disturbing. I think I’m actually less disturbed by (1) — the prospect that Google was evil. When someone is evil, you are always planning your counter-move. With (2) — the notion that there are well-meaning folks pecking away at creating moderately useful features, but overall, are just mailing it in — would mean that institutional memory and passion at Google have given away to an uncoordinated mishmash of people just doing their jobs. The latter makes for a pretty boring narrative for a poor ol’ blogger.

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