How Google Inflates AdWords Bids

https://plus.google.com/104371975904409493484/posts/XFYfF1jujdE

by veesahni • 15 years ago

147 50 15 years ago

plus.google.com

mmaunder2• 15 years ago

If the ads aren't limited to google's own properties, then this costs Google 68% of the total ad inventory that is shown on non-google sites, since that's the rev share.

Are they limited to Google's own properties? I've never used free ads, so curious. In a way that would help validate the theory, but the non-existence of a limitation wouldn't invalidate it.

Interesting observation and I think it's probably correct about the inflationary effect.

veesahni• 15 years ago

The vouchers give me a cash balance on my account, allowing me to spend it in any way I chose to. So no, they aren't limited to Google's own properties and Google would have to pay publishers on their content network.

However, they operate with an unknown spread between the publisher payout and the advertiser bids - not sure how they would handle payout in the case where no real money was actually spent.

mmaunder2• 15 years ago

They've said their revshare is 68% in the past:

http://adsense.blogspot.com/2010/05/adsense-revenue-share.ht...

It would require significant changes to their bidding and reporting applications to fudge paying out less for advertiser dollars sourced from a voucher. So I suspect they eat the cost and the net effect is an aggregate boost in earnings.

lawnchair_larry• 15 years ago

Sounds like a page out of the Goldman Sachs playbook.

jarek• 15 years ago

Would you care to elaborate?

aneth• 15 years ago

This is a great point. Seems even legally questionable to make people bid against "fake" money although I'm not sure what law is being violated. Is it legal as the seller in an auction to give out money to certain bidders, with the obvious effect of raising the price at almost no cost to the seller?

knewter• 15 years ago

not give out money. give out 'bid-coupons'. money would cost them. this doesn't.

pdenya2• 15 years ago

In my experience Google required me to speak to a representative to claim my $100 credit. I had already done research with the keyword tool and had a list of keywords I wanted to use and the prices I was going to initially bid for them.

The woman I spoke to used generic keywords instead of the specific keywords I requested ("Necklace" vs "Bendable Necklace", etc) and set the per-click price much higher than I requested ($3 vs $.15). She required that it was setup that way "to make sure everything is working" and I could "change it later". This burned through $21 of my $100 credit in about 1 minute.

So yes, Google is actively encouraging much higher spending with credits.

joelrunyon10• 15 years ago

This isn't standard Google-fare.

Are you sure you weren't talking to a marketing consultant that was giving out those coupons (Google gives those out to consultants like candy to sign up new advertisers).

adgar• 15 years ago

I'm skeptical about this too. Especially since your parent poster seems to imply he got Google on the phone with a $100 free adwords card, which everyone and their mother has gotten at one point or another. I just got one from my freaking domain provider for "loyalty" (2 years? Loyal? meh)

OstiaAntica• 15 years ago

I've used Google AdWords since it launched. In the past year, I've been locked in a death spiral with the service. The cost-per-click has sky-rocketed even as I dial back my bids and budget. I'm in a low traffic category so there's nothing external going on....Google is getting better and better at extracting every last penny of value from me.

chalst• 15 years ago

I've had a somewhat similar experience: I've been using Adwords for about 4 years and seen its cost skyrocket over the period from about 16 months ago to about 11 months ago.

I was running ads of about Eur 130 per month, and let my costs increase to over Eur 200 per month, to dramatically declining response quality. I reworked my whole advertising strategy, and have cut my spend on Adwords to about Eur 40 per month, on just the most proven keywords for top positions.

paganel• 15 years ago

> Google is getting better and better at extracting every last penny of value from me.

That's what monopolies are good at.

tristanperry• 15 years ago

A bit off-topic, but this is a good description of the good (if any) and bad of quantitative easing..

zandorg• 15 years ago

I got a $45 voucher (in the UK; £30) and I spoke to a rep on the phone. He said do this, do that, yet about 2 months later and my spent is £10 for that period! I'm actually disillusioned because I'm not getting enough clicks!

My theory is that Bing is taking more and more clicks away, so I'll have to find another way of promoting my business/projects.

joelrunyon10• 15 years ago

Simple fix: add more keywords. Raise your budget.

joelrunyon10• 15 years ago

Another simple fix: Use Bing.

JeffL• 15 years ago

Is Bing worth using at all? I set up a campaign on Microsoft a few years ago before it was Bing, but never really got any clicks out of (a few clicks a month) using basically all the same key words and ads I was using on Adwords and getting thousands of clicks a day there.

nhashem• 15 years ago

I'm getting increasingly convinced that AdWords is basically a scam. I worked on SEM optimization tools for two companies in the mid-2000s and ROI was great. Then ROI started to erode as the years passed as other players in our vertical entered our space, and as far we could tell, they were either a) just spending to make a huge brand play or b) had some way to monetize 150% than us because their CPCs were literally 150% higher.

My theory is that since SEM is often a separate unit from every other marketing organization in a company, this is what happens: The SEM team sets up an AdWords campaign, get great ROI on terms that contain their company's name or whatever, and crappy ROI on everything else. But the campaigns as a whole are ROI-positive, and because they're all being evaluated on that, no one will ever suggest, "hey, I know our company name is Joe's Widgets and we get great ROI on keywords like 'joes widgets,' but maybe we shouldn't buy that keyword at all because anyone searching for that will also see us as the #1 organic Google result." Because if the SEM team did that then their campaigns would no longer be ROI positive even if the company as a whole would benefit, and working for unprofitable departments is generally not good for your career.

Now I'm working at a company that's a major AdSense publisher and at least once a quarter something happens where we get a huge clawback for "quality issues we can't disclose," or we have to change our implementation, or whatever. It's just totally infuriating and I've realized there must be a lot of people like me who have basically spent their entire career being Google's bitch on the traffic acquisition side or monetization side.

I'm not so worried about monetization, as there is more than one way to make money from the internet besides AdSense. But as far as AdWords, I'm wondering if there's going to finally be some sort of tipping point where the mid-sized companies that have gotten squeezed out of AdWords find some other paid traffic provider that isn't infested by a) huge companies just making stupid brand players and b) small players blowing their $100 credit like what is described by the OP.

What would such a traffic provider look like? They have to be search PPC (again, lots of options for non-search paid traffic), they have to have enough volume, they have to have the technology to combat things like click fraud, and they have to be called something else besides Bing/Yahoo (which unfortunately have all the problems Google does, except less volume and even more terrible advertiser tools/APIs).

AJ0073• 15 years ago

Adwords is an auction. Because other people want to spend more than you doesn't make it a scam. And it doesn't matter why they want to spend more. People that purchase newspaper and traditional television advertising don't measure ROI because they can't.

I don't know how much credit Google gives out, but when a major auto insurance company has blanket $100 per click bids, that $75 voucher's impact will be measured far in to the decimal points.

The opacity behind Google's bidding system allows for fraud since they can calculate how much each bidder needs to pay differently. Thus spot #2 may actually be paying more per click than spot #1. In some instances, a fluctuating baseline bid may have the same impact as shill bidding in a traditional auction. Whether or not it is explicitly fraud, or a scam, if the outcome is the same, regulators will likely carefully review the process in any anti-trust investigation.

jfoutz• 15 years ago

An auction house using shills to bid up auctions is indeed a scam.

jcampbell1• 15 years ago

With the auction model, the spoils go to whoever has the highest margin, and in my industry it is people doing reverse billing scams. I am not willing to advertise a price of $9.95, and then charge people's credit cards $130 every month after that, based on an agreement that is in low contrast and 11px font.[1] You are right, that an auction model doesn't make it a scam, but it does invite scams, and Google should be extra vigilant at policing the scams.

[1] https://www.pimsleurapproach.com/special-offer/

joelrunyon10• 15 years ago

^This^ Just because you lose, doesn't mean it's a scam.

If you're getting outbidded by people they more-than-likely figured out a way to monetize the customer on the backend a lot better than you. A lot of things on Adwords depend on breaking even on the front end and monetizing them over the long-term.

That said, the article does raise some interesting points - but it's interesting to see how those vouchers seem to have had a more of a net-negative experience for small advertisers who've been burned and turned off of AdWords. That said, I work with some pretty big companies and we see some great ROI on our work.

yuhong• 15 years ago

I wonder what will happen to Google's revenue when that tipping point happens.

jaredmck2• 15 years ago

In a lot of spaces, especially those where offline players are just starting to put a lot of weight into online marketing, those near the top clearly don't have positive ROI - at least not on the specific campaign. The mixture of big companies outsourcing to agencies and mom-and-pops being led by google to give this online advertising thing a shot has definitely led to bids being out of hand in many areas.

Broad match is simply a genius play by google, although there's certainly a bit of disingenuousness behind a lot of the messaging around the adwords product.

It'll be interesting to see what happens with the new "dynamic ads" product, as it's clearly designed to provide less sophisticated advertisers with a simple way to give google their money. They'll build the ads for you! Automatically! How kind of google to provide such a service...

amitamin• 15 years ago

It would take a significant amount of free vs. paid in the system for there to be a true inflationary effect, rather than small microcosms that are impacted. We’ll all gotten free credits or know of people getting free credits, but compared to the spend of real campaigns, I would say insignificant?

jaredmck2• 15 years ago

It has to be - if there's billions being spent on adwords, even a million businesses spending free vouchers would be only slightly inflationary. Although perhaps this has more of an effect on smaller sectors which were more brick-and-mortar based.

gojomo• 15 years ago

Some basic microeconomics, with a simplified model that approximates the Google AdWords auction, renders this not very surprising.

If an ad costs Google $0.01 to serve, but provides an advertiser $1.00 worth of benefit, then possible prices for that placement are anywhere from $0.02 (providing Google with $0.01 profit and the advertiser $0.98 benefit) all the way to $0.99 (providing Google with $0.98 profit and the advertiser $0.01 benefit). A price any lower and a rational Google won't bother to offer the service, a price any higher and a rational advertiser won't bother to buy it (modulo all sorts of approximation/measurement issues, of course).

Whether a negotiation converges closer to the $0.02 or $0.99 price depends on many things, including hard factors like the number of buyers/sellers/alternatives and soft factors like traditional expectations.

The situation Google faces – a near monopoly seller, and many competitive buyers – is already pretty close to ideal for them to drive prices up to the very edge of buyers' willingness to pay. It's hard for those buyers to coordinate to keep their bids down, though over time they might via an iterative 'flocking' process try to stop donating every extra dollar (or in economic terms, the 'surplus from trade') to Google.

For example, if there are 5 highly competitive bidders, they might converge on bids $0.99, $0.98, $0.97, $0.96, $0.95 to reflect their relative desire for #1-#5 placement. But then starting with the person in 5th, they may iterative experiment if they can maintain relative placement with lower bids. Bids of $0.06, $0.05, $0.04, $0.03, $0.02 maintain the same relative order, leave Google a tiny profit, but reassign most of the benefit to the bidders.

If the buyers were to meet to try to accelerate this process, they might run afoul of antitrust law. If Google wants to have a meeting of its CS, economics, and systems-research PhDs to brainstorm ways to drive up the effective prices paid, they just need to reserve a conference room at the Googleplex.

So there are a lot of features and policies of Google AdWords that serve to nudge bids higher and prevent any flocking downward. 'Broad match' brings in competitors from nearby markets. Opaque ad/page fitness scoring keeps unsophisticated bidders guessing about the direct effects of their bid changes. Google communications encourage buyers to state their maximum, start high and work down, and donate to Google all the analytics/conversion data that will help Google discover the maximum value a buyer is receiving.

Even throwing in a few unsophisticated/irrational/novice bidders from time to time can also help: their overbids, until they realize their mistake, may help push up the bids of other more efficient businesses, who were previously collecting more of the benefit that Google could be capturing for itself.

Adding more people bidding with 'house money' (especially novice businesses increasing the number of competitors), and the amount of blindly obedient high-bidding and broad-match-bidding, helps on all these dimensions. Even if Google AdWords reps counsel these new buyers against irrational bids, so that the new bidders still receive some marginal benefit from participation, the added value-extraction from prior bidders, now paying more, could offset some or all of the promotional costs. And that's even before considering any persistent effect via new customers or nudged-higher-bid-levels.

Any of the bidders are of course always free to drop out if they're no longer gaining some benefit over not advertising at all. But the relative division of benefits is changed in Google's favor: the promotional programs can be a crafty, roundabout way of increasing prices.

6ren• 15 years ago

Well, if the price goes up, the other bidders should reconsider if it's worthwhile for them. But I have to say that Google's business model is brilliant:

- advertisers bid against each other for top placement. It is absolutely fair for the advertisers to compete with each other, and google cannot be accused of squeezing them with higher prices - yet as a natural by-product, google gets the highest possible price...

- google provides a wonderful service to people searching the web, for free - how could you possibly complain about that? Yet, it has these enormous revenues from advertisers. So, this is the old TV formula; but improved with the auction above.

It's fair, it's helpful, it's enormously profitable.

Retric• 15 years ago

TV commercials also used the auction model. Just look at how much it costs to run adds during the supper bowl.

kingsidharth• 15 years ago

So people spending $100 bidding higher. Let's say $50/click will increase your bid pressure? They will get 2 clicks and done. While regular bidders will stay in for long.

I highly doubt google has more freeloaders than paying customers.

I am not sure how it works now but last time I got a voucher (last year) they charged you for actual click and those $100 are just to get you started.

patio11• 15 years ago

This would be a mostly ineffective and impressively devious way to increase ad bids when Google could just, you know, refuse to fill orders at prices below a reserve price chosen to maximize their own revenue.

You know they do that, right?

AdWords is not an auction. AdWords incorporates an auction-like mechanic in part of its pricing strategy. There are numerous other ingredients in the secret sauce. We don't know what they are, but some of the public ones are explicitly chosen to make understanding auction mechanics less lucrative. (That one is called "Quality Score", which is a wonderfully Orwellian coinage for "Maximizing Google Revenue Heuristic.")

In an auction you are competing against other bidders. On AdWords, you are competing against Google. In aggregate, Google is winning.

(n.b. I like AdWords, but it would be an impressively bad time to assume corporate fluffy-bunnyhood when managing one's AdWords account.)

robryan• 15 years ago

I have been wondering about that soft reserve value they have. Know of any information online about how it is calculated? Been wondering without competition on a keyword if there is some mostly common lower bound on bid to be shown or does it fluctuate depending on the search term.

joelrunyon10• 15 years ago

It's fairly arbitrary. A lot of times they'll show random "first page bids" that have absolutely no reflection on the actual bids it takes to show up on the first page. That said, it doesn't stop them from trying to make you up your bids in an attempt to grab more impressions :).

fypomg• 15 years ago

The effect of this one time gift is temporary. The obvious overall goal is to gain longtime users, not short term gains by burning through free credits. The overall effect resulting in raised bids for current advertisers is negligible. Unless you have thousands of new adwords users opening up accounts, focusing their free credits towards the same term that is already competitive, then yeah, sure, ppc will increase a little.

You're running a small business, lets say you receive a credit of $100 to start an adwords account. You'll see from the adwords campaign a noticeable increase in traffic occurs, you can track phone calls from ad campaigns, and observe click-throughs to emails/sales received from running campaigns.

Great. Then you increase your budget to $1,000 a month on adwords, watch as pay-per-click supplements organic traffic that wouldn't otherwise be captured.

Beyond that, within the first month or so of having a new adwords account, Google (with a live and knowledgable rep out of Ann Arbor) personally helps you set up and optimize your campaigns (a service that predatory SEO and SEM experts typically gouge small businesses on). All of this is for free to help businesses understand how to use a tool that touches 65%? of users online. Disgraceful. How dare Google make money and put you in touch with consumers who don't know about your products or services.

gscott• 15 years ago

I have gone from spending 6k on adwords to about 15k with fewer sales.. I have done everything possible but there is no reversing the decline. My employer is quite unhappy with me luckily 80+ percent of his business is not driven by Google. I became adwords qualified, deleted all of the non performing keywords, hired a $200 an hour consultant a favorite of Google's from the help board, the website design is very professional, and keyword targeting is all perfect for the business. It is quite depressing.

fauigerzigerk• 15 years ago

I strongly recommend looking at other platforms before spending more money on AdWords

I guess this last sentence shows why inflating prices that way cannot be a deliberate strategy on Google's part unless they are over-confident quasi monopolists, which I don't think they are (yet).

How Google Inflates AdWords Bids

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