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Search advertising and the little guys

January 12, 2007

Search-based advertisements, like the ones distributed through Google's AdWords service, were supposed to be a boon for small businesses. Cheap and precisely targeted, they would, for the first time, put the little guys on equal footing with the big guys in the ad market. They'd level the playing field.

And that's been pretty true. Until now, anyway.

Business Week reports that smaller businesses appear to be cutting back on search advertising. "Many small and midsize marketers are buying far fewer 'keywords,' and phrases," reports the magazine. Why? Because the big guys are at last moving in in force, and the small fry are getting priced out of the market. The playing field is tilting again.

The dynamic's pretty easy to understand. For the little guys, search ads are economically attractive only when they produce a relatively high percentage of direct sales. The direct revenues have to be higher than the ad costs. For the big guys, though, search ads can also be valuable as brand advertising - promoting the company and its products without necessarily leading to clicks and sales. As the big guys take the branding value into account, they become willing to bid more for the ads. And as the price of the ads inflates, they can quickly turn from a money-winning proposition to a money-losing one for the little guys.

This is what seems to be happening today, at least in many product categories. As Business Week writes, "Brand giants from Best Buy to Zale Corp, are diverting more and more of their marketing budgets to search ads. They're driving up prices and stealing customers from some of the smaller businesses that have bought the bulk of those ads." For Google and the other search-ad syndicators, that's fine. They win as prices go up: "The rush of ad dollars from big brands into search is more than making up for any cutbacks by smaller outfits."

Google has promoted its AdWords service as a great equalizer. It launched AdWords, it says, "to extend the power of its keyword-targeted advertising to smaller businesses." In 2005, CEO Eric Schmidt spoke eloquently of how AdWords was creating a "long tail" of advertising, delivering benefits to "businesses [that] haven't been served by traditional advertising sales." But at the same time Schmidt was telling investors how "last year we brought out a whole suite of tools for very large advertisers who can use our services in all of their divisions to generate lots and lots of revenues." On AdWords everyone's equal, but the big spenders are just a little bit more equal than everyone else.

To be sure, Google is sincere in its desire to have many small companies bid on ads. Not only does the company enjoy thinking of itself as an egalitarian force, but it also knows that the more bidders, the better. It's also quite happy, though, to give special tools and information to the big guys, giving them a further leg up in the bidding for search ads. It's overriding goal is, of course, to maximize ad sales, not to level playing fields.


Google doesn't get paid per ad shown, however - they get paid per ad clicked. Google makes more money from a $1/click ad that gets a 10% clickthrough rate then it does from a $5/click ad that gets a 1% clickthrough rate.

That said, I suspect there's no real difference in clickthrough rate between ads placed by the little guy exclusively interested in sales, and ads placed by the big guy who also benefits from ancillary branding.

I wonder if the ads themselves really make any difference? I wouldn't be surprised if clickthrough rate is a function of the adword, not the ad itself.

Posted by: finn [TypeKey Profile Page] at January 12, 2007 12:19 PM

Especially as Google seems ready and eager to even further devour its long tail when it can get away with it, as when it controls placement of its own logo/brand "tips" placement above all--that is until recently kicked to the curb by Blake Ross. http://www.blakeross.com/2006/12/25/google-tips/

Posted by: oprichniki [TypeKey Profile Page] at January 12, 2007 05:37 PM

Let's not forget a lot of these 'little guys' have lousy sites and were making money only because Google could give them eager buyers and nobody was competing with them for these leads. Many of these should just be thankful for the time they had.

Interestingly, I took a look at the Diamond category mentioned in the BW article, and found that in fact ZERO 'big guys' including Zales where there. Small guys can drive up prices too. More thoughts here.

Posted by: Craig Danuloff [TypeKey Profile Page] at January 12, 2007 09:05 PM

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