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The Google AdWords Ad Marketplace Is Not Rational, But You Should Be

I recently had a conversation with a client where we were looking at an ad campaign in Google AdWords that was, for lack of a better word, struggling.

Covering The PPC Basics

We’d done all of the basic blocking and tackling:

  • Focusing on phrases that had a higher probability of buying intent (somewhere in between Broad Match and “the tail”)
    • It’s worth noting that over the years, Google has gone from encouraging advertisers to pursue long-tail keywords in favor of encouraging advertisers to focus on broader terms
  • Adding negative keywords
  • Writing ads to attract buyers-not-browsers
  • Testing ad variations
  • Creating landing pages based on best practices (and ones that have worked very effectively for companies with similar profiles)
  • Testing landing pages

Targeting Quality Over Quantity

One area we had not touched was the actual Offer.  Our initial goal was to get the “hard” conversion (a sales lead) as opposed to the “soft” conversion (a download, sign-up, etc.).

This seemed to be a reasonable strategy for this particular company, because we were prepared to pay a much higher Cost Per Conversion for the “right” kind of lead, rather than put larger volumes of softer leads into the marketing pipeline.

This strategy is always debatable, and worth a conversation.


At the end of roughly 60 days of this activity, our lead generation efforts were decidedly a “failure.”  Not enough leads, at an unacceptable Cost Per Conversion.

The Average Cost Per Click was at such a high level that it appeared that we were suffering a penalty vs. what Google’s Keyword Tool and Traffic Estimation Tool implied. The tools provided by Google seemed to suggest that we should be paying less for each click than were actually were paying.

An inquiry to Google’s AdWords staff indicated that we were not suffering a Quality Score penalty because of any of our tactics or overall account history. Instead, we were told that the keywords we were bidding on appear to have the same overall poor Quality Scores across the AdWords marketplace (an assertion I find hard to believe).

The Inevitable Question

That’s when the question from the client arose of, “our competitors are advertising consistently for the same keywords, why is it working for them?”

The AdWords Market Place Is Not Rational

Although we had done our early competitive analysis, and taken some strategic and tactical cues from what we saw, the answer is, and may always be – Google AdWords does NOT provide a rational marketplace. The Google AdWords marketplace is not even an efficient marketplace.

In order to satisfy the Economics purists here, I am not looking at anything beyond the basic premise of the intersection between  the Efficient Market Hypothesis (EMH), Rational Expectations, and  basic Supply and Demand theoryperfect information, or near-perfect information, leads to rational economic decisions.

There is nothing rational or efficient about advertising via Google AdWords!

Here are just a few reasons:

  • Google obscures the bidding mechanisms behind AdWords, and claims them as proprietary technology (you’re running blind at the very start)
  • You will never know exactly what your competitors are paying for each click
  • The marketplace is still too new to possibly have settled into a reasonable economic rhythm – new entrants, with varying levels of direct marketing experience, are constantly entering your keyword space
  • Companies have varying levels of skill and sophistication when it comes to converting website visitors

Your Economic Model Is What Counts

Most importantly, companies have varying economic models – high-volume/low margin, high-margin/lower volume, single revenue streams vs. multiple revenue streams, etc.

In other words, you cannot take cues from other advertisers about whether or not you should be bidding at certain levels for keywords, or even participating in PPC advertising at all.

The best that you can do, other than use best PPC practices, is measure your own economic results and make decisions based on your own information. And, you must go beyond basic Cost Per Conversion analysis/metrics.

In an e-commerce environment, you have to not only evaluate if you are getting a financial return on the immediate transaction, you also have to evaluate the lifetime value of a customer acquired through PPC. You may be able to “get away with” using a basic rule of thumb culled from your e-commerce history.

For example, on average, a customer who purchases a product on your site will become a repeat customer X amount of the time and average $XX in sales. It’s better if you can partition off your PPC efforts into its own lifetime value analysis.

In a lead generation environment, you have to follow your leads, down to the keyword level, throughout the sales cycle. In order to add an even more accurate measurement, you need to have an understanding of how many other touch points a prospect will encounter in your overall marketing efforts, and develop a model for how effectively you convert leads once they enter your marketing system.

Key Takeaway

Without this information, you will always be faced with the question of why so many advertisers are bidding on your keywords in AdWords, and why they seem to spend so much money on that effort. You have to get to a level of comfort about your own financial return on investment, and use that as the basis of making a decision about whether or not to continue operating a Google AdWords advertising effort.

Opinions expressed in this article are those of the guest author and not necessarily Search Engine Land. Staff authors are listed here.

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