General failure to understand…
I’ve seen references in a couple of places to Googles alleged exposure to the mortgage crisis brewing in the US. Again, I am amused by the spectacle of otherwise intelligent individuals displaying a truly staggering lack of appreciation of how things work online.
Much handwringing is happening over the assumed crunch in advertising spend, and it’s possible impact on the online sector. Since advertising ALWAYS gets cut in a spending squeeze, that’s going to cut into G’s spectactular growth, right?
Wrong. Now, let’s look at why it’s wrong. First, the assumption is that the relationship between spend and return is essentially linear - you spend x, you get y return. The x:y relationship may vary by season, by channel and is affected by the quality of a campaign, but the basic relationship is always the same.
Not so in Google. AdWords is in some ways not just a channel, but a marketplace. You can tweak things endlessly, and there’s no exclusivity. Unlike a print channel, say, you can’t pay to dominate a particular space, you bid for it. If competition is high, you get a correspondingly smaller slice. Also, due to the model used, the highest bidder does NOT always win. You can grab the coveted #1 spot and be paying substantially less than your nearest rivals (brief experimentation with the UK interface indicates that the current price for the top spot is between £7 and £10, low in historic terms, but not necessarily accurate).
That is further complicated by the churn of competitors, especially in percieved high value terms. Usually some n00b outfit, having spent the last 3 years selecting a traditional media agency to mis-manage their PPC efforts, bursts onto the scene, bidding on about 10 terms with poorly optimised ad copy and a £50 max CPC. Although they’ll burn their budget in a week, the agency doesn’t care - they are getting their fee. The merchant doesn’t care - it’s not “their” money at stake, it’s the companies. The objective is usually to be able to report upwards how great you are at online marketing, to give you something to talk about at your next annual review anyway, not ROI.
The serious players just ride it out - it’s just part of the cost of doing business by now. All of these things together make for a very dynamic marketplace, but however volatile things get, it’s almost always cheaper than the alternatives.
Whilst not everyone appreciates this, there are (at time of writing) nearly 200 advertisers listed on the term “mortgage”. Even if some drop out, the others will take their place.
“Ah-ha”, comes the cry, “then the average CPC will drop, and Google will feel the pain”. Again, not so - dynamic marketplace, remember? As the average CPC drops, the term becomes more attractive to more players, who wade in with their own bids. Lesser placed players get a taste of the Internet crack, and the traffic hose that Google can be - and they like it. They want to keep it coming… so they up their bids to maintain their new, better positions. Both of these will tend to push back and RAISE average CPCs right back where they came from.
Granted, those that drop out are likely to be less efficient advertisers who owe more to their max CPCs than the quality of their advertising, but there’s no lack of depth in the advertiser pool, so a modest “correction” in average CPC might occur, but not the catastrophic slide that most observers seem to be worrying about. What *could* hurt is the drop in numbers of those looking for a mortgage. That is the real driver in the Adwords market - search volume. As credit tightens and consumer confidence wobbles, the numbers of searches conducted on mortgage related terms may drop, and THAT could slow Googles revenue growth. All the inventory in the world is worthless if no-one responds to it.
But, although raw numbers may drop, in a tight market, do you think people look at more or less options, on average? I suspect more. So, even a contraction of the available market may not have a directly linear effect on revenues. Since we’ve already conceded that average CPCs are likely to decrease, the corresponding decrease in conversions due to consumers shopping around more may well cancel out with it, leading to a fairly stable average cost of acquisition for those advertisers who remain.
Most of these arguments apply equally well to almost any sector. The fact is the online population continues to grow and mature as more and more consumption moves online. As some advertisers drop out, others get a chance to grow. If “traditional” advertisers fall by the way side, a new breed of Internet-only types will take their place. VERY few people outside the industry appreciate the financial power that is held by affiliate, for instance - there are a few PPC players around the world who are capable of investing millions / month who would LOVE the opportunity to play in high value sectors that they are currently priced out of. Whilst they can’t replace corporate ad spend indefinitely, they can cover a lot mor of it than most people suppose. Only time will tell for sure, but I think the Google train will keep on rollin’, at least for now.