14.4 Search Advertising

The practice of running and optimizing search engine ad campaigns is referred to as search engine marketing (SEM) (Elliott, 2006). SEM is a hot topic in an increasingly influential field, so it’s worth spending some time learning how search advertising works on the Internet’s largest search engine.

Roughly two-thirds of Google’s revenues come from ads served on its own sites, and the vast majority of this revenue comes from search engine ads¹. During Google’s early years, the firm actually resisted making money through ads. In fact, while at Stanford, Brin and Page even coauthored a paper titled “The Evils of Advertising” (Vise, 2008). But when Yahoo! and others balked at buying Google’s search technology (offered for as little as $500,000), Google needed to explore additional revenue streams. It wasn’t until two years after incorporation that Google ran ads alongside organic search results. That first ad, one for “Live Mail Order Lobsters,” appeared just minutes after the firm posted a link reading “See Your Ad Here”) (Levy, 2009).>

Google has only recently begun incorporating video and image ads into search. For the most part, the ads you’ll see to the right (and sometimes top) of Google’s organic search results appear as keyword advertising, meaning they’re targeted based on a user’s query. Advertisers bid on the keywords and phrases that they’d like to use to trigger the display of their ad. Linking ads to search was a brilliant move, since the user’s search term indicates an overt interest in a given topic. Want to sell hotel stays in Tahiti? Link your ads to the search term “Tahiti Vacation.”

Not only are search ads highly targeted, advertisers only pay for results. Text ads appearing on Google search pages are billed on a pay-per-click (PPC) basis, meaning that advertisers don’t spend a penny unless someone actually clicks on their ad. Note that the term pay-per-click is sometimes used interchangeably with the term cost-per-click (CPC).

If an advertiser wants to display an ad on Google search, they can set up a Google AdWords advertising account in minutes, specifying just a single ad, or multiple ad campaigns that trigger different ads for different keywords. Advertisers also specify what they’re willing to pay each time an ad is clicked, how much their overall ad budget is, and they can control additional parameters, such as the timing and duration of an ad campaign.

If no one clicks on an ad, Google doesn’t make money, advertisers don’t attract customers, and searchers aren’t seeing ads they’re interested in. So in order to create a winning scenario for everyone, Google has developed a precise ad ranking formula that rewards top performing ads by considering two metrics: the maximum CPC that an advertiser is willing to pay, and the advertisement’s quality score—a broad measure of ad performance. Create high quality ads and your advertisements might appear ahead of competition, even if your competitors bid more than you. But if ads perform poorly they’ll fall in rankings or even drop from display consideration.

Below is the formula used by Google to determine the rank order of sponsored links appearing on search results pages.

Ad Rank = Maximum CPC × Quality Score

One factor that goes into determining an ad’s quality score is the click-through rate (CTR) for the ad, the number of users who clicked an ad divided by the number of times the ad was delivered (the impressions). The CTR measures the percentage of people who clicked on an ad to arrive at a destination-site. Also included in a quality score are the overall history of click performance for the keywords linked to the ad, the relevance of an ad’s text to the user’s query, and Google’s automated assessment of the user experience on the landing page—the Web site displayed when a user clicks on the ad. Ads that don’t get many clicks, ad descriptions that have nothing to do with query terms, and ads that direct users to generic pages that load slowly or aren’t strongly related to the keywords and descriptions used in an ad, will all lower an ad’s chance of being displayed².

When an ad is clicked, advertisers don’t actually pay their maximum CPC; Google discounts ads to just one cent more than the minimum necessary to maintain an ad’s position on the page. So if you bid one dollar per click, but the ad ranked below you bids ninety cents, you’ll pay just ninety-one cents if the ad is clicked. Discounting was a brilliant move. No one wants to get caught excessively overbidding rivals, so discounting helps reduce the possibility of this so-called bidder’s remorse. And with this risk minimized, the system actually encouraged higher bids (Levy, 2009)!

Ad ranking and cost-per-click calculations take place as part of an automated auction that occurs every time a user conducts a search. Advertisers get a running total of ad performance statistics so that they can monitor the return on their investment and tweak promotional efforts for better results. And this whole system is automated for self-service—all it takes is a credit card, an ad idea, and you’re ready to go.

¹Google, “Google Announces Fourth Quarter and Fiscal Year 2008 Results,” press release, January 22, 2009.

²Google, Marketing and Advertising Using Google: Targeting Your Advertising to the Right Audience (Boston: Cengage Learning, 2007).

References

Elliott, S., “More Agencies Investing in Marketing with a Click,” New York Times, March 14, 2006.

Levy, S., “The Secrets of Googlenomics,” Wired, June 2009.

Mann, C., “How Click Fraud Could Swallow the Internet,” Wired, January 2006.

Olsen, S., “Google, Yahoo Bury the Legal Hatchet,” CNET, August 9, 2004.

Vise, D., “Google’s Decade,” Technology Review, September 12, 2008.