Economics is the study of relationships between supply and demand sprinkled with an understanding of human behavior.
Pricing is something that most business owners GUESS, and they typically fall within the average area where the demand curve intersects with the supply curve.
Then, the distribution of pricing among the entire population of competitors in a specific industry is often bell shaped with outliers at both the high and low ends of the pricing spectrum.
Google recently announced a change to their advertisement algorithm. Specifically, the change is that the top ad position will now be determined by the MAX BID instead of the highest actual cost per click.
This is a very smart move in terms of Google's potential revenue and the impact this change will have on business bidding behavior:
- Supply is limited to 1-3 positions above the organic results.
- Business owners who see their competitors take the top positions will want to out-bid that person by raising their maximum bid, thereby gaining control of the top position.
- The ripple effect of one competitor raising their bid is tremendous, especially with the bid management software and bid management companies available today - somebody is keeping an eye on things. When one competitor is bumped into a different position, the bid is automatically or manually changed to compensate for the lost/preferred position.
- When the top bidder raises their maximum cpc, and several others follow suit, the costs incrementally rise because everybody wants to have the higher max cpc even though they rarely pay their maximum rate! Raising your max cpc will inherently increase your costs.
- These costs are ultimately going into Google's pocket, and I have to tip my hat their way because this was a genius, strategic move on their part while trying hard to make it a win/win situation.
Google made the move based on the current behavior of their advertisers and the quality level of the advertisements.
Google took advantage of this behavior by looking at the supply, tapping their chins, and saying "hmmmmmm" while they thought of ways to manipulate demand. They HAD TO MOVE the demand curve to the right because the supply curve is fixed!
When the demand curve moves to the right on a fixed supply curve, costs generally rise for the buyer while revenue rises for the supplier.
What do you think? Would this be considered 'evil' or is it REALLY a win/win situation?
I had to chime in and thought about posting a response on my blog but I think I can be effective enough in a response here.
The assertion that there will/has been a change of demand in the short run is incorrect. Google's Adwords announcement has not drawn MORE people into the PPC market. If this was the case then Google could infinitely increase MAX bids and (according to your assumption) have the demand to support it. What is actually happening is called a change in quantity demanded. The existing players are demanding more but there are no new entrants….yet.
To explain with your graph, the demand curve doesn't actually shift to the right but stays put. The price point is mobbing to the left along the same demand curve as existing players bid more. That means right now as we speak there is disequilibrium in the market (because supply doesn’t equal demand—the lines aren’t intersecting). Of course, you have stated that there is a restricted supply so that means the market needs to adjust back into equilibrium. How will this happen? Those who can't afford the new bids will fall out of the market, quantity demanded will decrease, and theoretically price points will go back to the equilibrium and everyone will be back to where we were last week (price wise.)
Of course, there must be a long term price increase overall or Google wouldn't look at the change. With this in mind a change in demand will occur but only because existing market players spend more because they like the idea of getting top placements and/or new business enter the fray (those aren’t the only two scenarios but you get the idea). Just my two cents.
Agree with Barry N that the model is wrong. However saying that I don't think he is perfectly right either. I think you will find it has more to do with the elasticity of demand, hence Google (monopolistic market) can shift the supply curve to the left JSaying that I never really did pay much attention in economics.
Regardless of elasticity of demand the demand curve hasn't shifted. Elasticity of demand is essentially just the slope of the demand curve. James is right (from what I can observe at the top of my head) that supply stays constant so there is no shift there.
wouldn't the supply line get steeper or move up? therefore an increase in price yet the demand is still the same?
Yes demand is inelastic (and agree demand curve does not shift or move) hence the supply curve can be shifted without little repercussion.
It is not the quantity of supply that shifts the supply curve but rather the factors determining pricing.
Barry, I stand corrected. As the graph states, if demand shifts to the right, then the quantity supplied would have to incrementally increase too - and that is not the case. Of course, I was trying to illustrate the idyllic nature of this change. While I think there is a shift in quantity demanded as more competitors "enter" the top 1-3 search ad market, supply IS fixed and therefore limited so the market will be out of equilibrium while at the same time commanding a higher cost or price point. Barry, what do you think of this new image? I believe this is how I should have displayed the increase in cost:
https://www.apollosem.org/images/ad-supply-demand.jpg
Thank you for your comment!
https://www.distinctseo.com/images/graph1.gif
Try that. It includes the poster below and their thoughts on the supply curve. That's what I think will happen; quantity demanded moves to left and then back down to equilibrium. Of course, we all may be wrong :P
This is a real pity as it will essentially lessen a clients motivation to maintain great, quality ads within their campaigns. I'll be interested to see the ranking weight (and consequent increased ad placement) attributed by increasing a campaigns maximum bid.
Sure QS (Quality Score) will play a factor in determining the leaders of the pack but as you've mentioned with modern bid reporting tools (including Google's own Budget Optimiser) we're just going to see a squeeze and likely increase by clients on their monthly spending budgets.
Can't wait to see a client that doesn't care about the maximum bid.
What is the most expensive keyword these days anyway? 'sex', 'porn', 'microsoft', 'free'? :D
Either way, Google just sapped small businesses competing with the big league spenders.
Ok, as a former student of economics, I have got to ad my own 2 cents... I could be wrong, because I haven't spent much time thinking about this, but I think that everyone has missed the point slightly here on the issue with the graph.
I believe the supply "curve" would actually be straight up and down. Supply doesn't change, and this latest event didn't change it. Each bidder can still only buy 1 ad per SERP, or 1 impression. The total number of impressions available to all bidders is still the same, too.
The thing that changes is demand. Demand curve shifts to the right, so the intersection of supply and demand is higher on the price side, but the same quantity is supplied.
An explanation of verticle supply can be found here:
https://www.directopedia.org/directory/Shopping-Jewelry/Supplies.shtml#Vertical_supply_curve
Therefore, we have higher prices because of bidders' impressions of the market. Everyone thinks everyone else is paying more, so everyone bids more - in other words, demand is now somewhat higher.
I'll blog on this soon.
https://searchnovice.blogspot.com
Yes, good assessment.
This post is on the right track, but it really missed the BIG picture of what Google is really out to do. Ultimately, Google IS trying to manipulate their own marketplace and market pricing without appearing evil. However, the big picture goes way beyond trying to incite higher prices, in fact higher prices are just the start.
I've written his before on my blog, other blogs, forums, etc... and it really comes down to Google controlling their own destiny. Anyone who does pay per click affiliate marketing knows that if you play the arbitrage game properly, you come out WAY ahead. Many times you can make 2-6x as much as you spend. That's only on affiliate comissions. Thus google is only making half as much or less as they could per per click. Imagine if Google could double, triple, or quadruple how much they make from their engine? That's how much money Google is leaving on the table.
But wait, the goal is even bigger. It's not just affiliate income Google wants, they want to be the ones managing a products whole advertising effort online. Already Google will help companies build their pay per click campagains. Eventually, Google will push all affiliates off its network and Google will be the sole super affiliate of many products on their network. Imagine, if blockbuster wants 1,000 leads a day, it will just oder 1,000 leads at $30 a lead and the deal is done. No more figuring out which words convert best, etc... Google will handle all of that.
You can see this already happening. Google already has pay per action ads on a small scale. Think of that as just testing the technology until it's ready. The real kicker happens if the Doubleclick deal finally goes through. With Doubleclick comes Performics, a top-tier search engine marketing and affiliate company. Thus, the whole affiliate management side of the Google master plan comes full circle. Performics can handle the new Google Affiliate program for businesses. That solves the people management problem. Google + Performics will mean the end to pay per click affiliate marketing as we know it on AdWords.
While my theory that Google wanted to push out affiliates and setup their own affiliate system sounded crazy a year ago, Google just keeps getting closer and closer all the time. Small advertisers and affiliates be warned, the tidal wave is coming, so be prepared.
Very good post and you hit the nail on the head i think!
Google have been spending like drunken saliors recently buying every company in sight and it comes as no shock to me that they have made this move
I don't think it's evil but it is not far off :) again i think this move highlights the importance of organic results if you are in the top 2/3 organic results there is no need to be bidding for the top 3 in the sponsored results anyway!
Absolutely!
Good reading.. You bring up valid points! This is going to change the playing field A LOT. The little guys are not going to be able to play with the big boys as much...
Great post! It is inevitable that changes in the algorithms will occur in order to keep the integrity of ads as well as increase profit for the different companies providing ads. Yahoo changed up their entire program not too long ago, so I am sure this is not the last bit of change we will see in PPC.
I agree that algorithm changes are inevitable.
Personally, I think it is good business - a very smart move that is a win/win situation due to the control we now have over those results. At the same time, more control equals greater costs for some of us and lower costs for others dependent upon the industry.
If the quality does genuinely improve then surely the supply will
as well.
Better quality adds will encourage more click throughs.
More successful click throughs will also ultimately mean more
impressions as more people use Google.
I suspect that this wont be the last adjustment either. Google's
revenue stream is so large that small adjustments can still bring in
substantial $ gains.
Oh...one final point...does this look like there will be a minimum
price for the top spot. So even if you are the only advertiser you
still pay top rate?
"Your actual CPC will continue to be determined by the auction, but subject to a minimum price for top spots."
Yes this is a good move from Googles point of view. As for the advertisers I am not sure. True they will have more control over where their ads appear with the search results. But you also need to take into effect all the companies that are currently advertising and don't have a clue how to track their budget, or even if they a budget set in place at that. These companies raise their bid just to get the positioning they want and then leave it at they, with no tracking.
It's amazing to me how many large companies are throwing millions of dollars into advertising and don't have a clue if it is working for them? Then they just call it branding their business.
It will be interesting to see how the whole launch works out, and which industries are effected the most.
This is why we should all invest in Google stock. GOOG is expensive, but the stock has never split. Limitless revenue potential. Our partners invested in GOOG at just under 400 per share, now look at it. I expect world wide hysteria once Google allows the stock to split.
Great analysis. I do wonder how this will change the click thru rate for the top ad. If the lower quality (less relevant) ad is promoted to the top and gets less clicks because it is less relevant then revenue might actually go down.
I think that this is Win:Win:Win... and maybe Win.... Bidder has two ways to claim top spot within his budget, Google rakes in more dough, buyer gets a more serious merchant.
The fourth win could be the Adsense publisher if this extends out to the top spot there - although it is not above the SERPs.
I think that jameszol's explanation here gives clarity to another area where people often misread what is happening. That is in adsense. Lots of people see their CPC for adsense drop significantly and immediately point a finger at Google hogging a bigger cut of the pie. I am betting that those situations are often a collapse of the bidding ladder as the one aggressive bidder pulls out and the rest are happy to see their costs fall.... which translates to a big revenue drop to the adsense publisher.
I've actually been waiting for this change to happen for awhile...one of the reasons my clients liked Yahoo's PPC better than Google's back in the day was that they had more control over where their ad appeared. Now it seems that Google is beginning a transition to a slightly more opaque, but similar, model. I too think it's a smart move on their part.
Well, it's not called pay-per-click for nothing...Google's strong position in the market allows them to make changes to their system like this without much fear of losing market share; this will increase their revenues, the big players will pay more but it may become more difficult for new players to compete at the top. Hopefully Google are keeping a close eye on the quality of the top listings as well...perhaps a minimum quality score should also be applied as a requirement for top three rankings.
The best thing I have read recently is:
Goole - leave the last G off for greed.
The impact on inactive terms has yet to be seen and the starting point when the entire keyword group bids raise will mean new advertisers will start at a higher cost....
All in all not hurting users only if you see users as searchers not client advertisers...
This is definetly an evil move, capitalism once again proves to make the rich richer and condem the less fortunate to strugle even more than acustomed to. Never the less making money is every business goal, yet at what price? We are digging up a hole that we won't be able to get out of. The time has come to think of the less fortunate and develope a nuetral ground for competition.
Así Es,
RT3
Does anyone see this becoming a problem for big brand advertisers? Google's TM policy worked with its previous algorithm because at least brands could protect positioning and CPC's with relevancy (i.e. control of TM in ad copy). Now, first position could be owned by a distributor or competitor with no repercussion. I don’t see how they will be able to maintain current TM policies with this change.
Certainly not evil. Just business. Good post.
Maybe I'm missing something obvious, but why will demand increase as a result of this algorithm change?
I'm thinking, just one of the reasons, new entrants in the market. firms who finally catch wind they can get a first place rank just by paying for it will enter the fray. If you don't think there's a lot of those kind of people then you haven't been to sleepy Canada where the majority of business with online potential are slow to adopt any form of web marketing strategy.
I'm a canuck too, eh. :-) And I know how slow companies up here can be when it comes to SEM/SEO. :-(
But I don't think this particular change will bring a significant number of new players to the table. In the grand scheme of things, it's a pretty small change to the way AdWords works overall.
(I do think the change will add to Google's revenue and increase the CPC for some advertisers, but it will be for reasons unrelated to demand.)
Besides of having one of the best looking websites on the Internet SEOmoz also provide very interesting articles - with a lot of useful and highly relevant materials just like this one!
I use a lot of money on the Google Adwords program and sell PPC and SEO campaigns through my website so this is highly relevant readings :-