So, the PPC and SEO universe is tittering about the news that Google is discontinuing right hand side ads. I’ve been getting a number of people asking what our take is on it.
Truth to be told, we’ve been screaming the inevibatility of Adwords/PPC maturing for years, from the rooftop.

Google believes that every click that has “commercial intent” should be monetized (because keywords with low commercial intent won’t have users clicking on ads anyways… oops, I said it!).

For the past couple of years, they’ve been quietly playing with the top ads, giving ad extensions and changing the layouts so most of the clicks go to the top ads.

They are on a mission to increase their profits, which by extension means more clicks on advertisers ads.

The side ads in the search results have been irrelevant for years, this is simply a symbolic move.

 

Understanding How Wall Street Judges Google – RPS

 

In 2014, Wall Street pounded Google for the drop in CPC’s on mobile, while at the same time, a lot of desktop search was migrating to mobile. In response, Google created enhanced campaigns, which forced advertisers to bid on desktop and mobile separately.

To understand what that means, we need to understand revenue per search.

The search engines look at revenue per search as a barometer of value and growth. Essentially, they divide the total revenue by total searches, and that gives RPS.

Revenue per search has 2 factors that drive it: “CPC” (cost per click) and “clickshare”.

The CPC is auction driven. Advertisers bid against each other for each search result, and Google uses an algorithm called quality score to rank those advertisers, as well as what they finally pay per click, vs what the advertiser bid. Bing & Yahoo have a very similar algorithm. Ultimately though, advertiser’s willingness to increase their bids is what increases the average payment per click.

The other element is “clickshare”. Similar to what PPC nerds think of as “CTR” for your ad, Google needs to know the percentage of clicks that go towards ads vs either people not clicking at all, or on the organic results.

 

Who monetizes their Search Results Better – Google or Bing?

bingvsgooglerps

 

Based on some analysis from Trefis of Google & Microsoft’s reported RPS, it appears that Google generates $1.41 in revenue from their search ads vs. every dollar from Microsoft. This is because Google has the larger advertiser base, as well as due to Google’s focus on testing new ad formats, styles and layouts on a consistent basis.

 

There’s no Google War on SEO

 

While Google has no war on SEO, (the SEO model is the publishing model. They need the free listings to keep people coming back, and clicking on paid listings, too), but they do want to maximize the number of advertiser clicks – their clickshare.

They balance these competing needs – to have relevant organic results, as well as getting advertisers to pay by increasing ad clickshare on searches that have “high commercial intent” – that the user wants to buy something. In that case, there’s nothing wrong, goes their thought process, with getting the user to click on the paid version of the advertisers’ results. In fact, the advertiser can inform the user on what they need far better, when they have actual control of the listing.

 

RPS is driven by CTR

 

The problem with CPC is that advertisers can’t continually and aggressively pay more for the same click and the same revenue. Google can get the CPC’s to go up somewhat consistently, which we’ll talk about in a moment, but the truth is, the easiest win historically has been to do constant testing, and increase the marketshare that advertiser’s ads get clicked on by users, instead of organic results, or the clickshare.

 

Google Has Quietly Been Increasing Clickshare at the Expense of SEO

 

Over the past 5 years, Google has been reportedly making hundreds of layout changes and tests each year, as well as giving advertisers a higher CTR using ad extensions like sitelinks to grab more marketshare than they previously had.

Average Position is a Useless Metric

One of the big secrets’ we’ve told our clients is that average position is irrelevant. What really counts is what percentage of time you are in the top listings. When you are in the top, your average Click through rate runs between 10-15%, while it’s 1/10th of that or less in the side listings.

Google doesn’t make much money (and neither do advertisers spend much) on the side.

Bottom line, Google has done such a good job on getting marketshare and attention to the top 3 listings, that the side has become irrelevant years ago. (To give you an idea, we see 30-60% collective click through rate for the top listings – and that doesn’t even include Google Shopping or the ads on the bottom of the page).

 

Contrary to the whining of Digitas SVP Shreya Kushari that “our cost per clicks is going to go up because we’re going to bid aggressively to be on the top”, this move to remove the side listings is more ceremonial, and a news item then a tidal change for advertisers.
For years, they haven’t been getting much from being on the side.

The only real change is that the fourth listing may potentially add more clickshare to paid search ads over SEO.

 

Google has quietly been replacing Text Ads with Google Shopping Ads

 

We had a client who had an interesting issue. They were bidding to be in the top 3 positions consistently, and getting high marketshare. However, their clicks kept on going down. What we discovered, when we compared theirs, and their top competitors “top of page share” (percentage of time they were on top), was that year over year, EVERY one of the advertisers had a lower percentage of the top positions. That was weird, though. If one advertiser went down, another has to go up, right?

Wrong.

This client’s SERP’s were becoming dominated by Google Shopping listings, and now, there was only one ad on the top position, which everyone was fighting for, while the rest of the ads were all on the side or bottom.

This advertiser, though the most aggressive in his market, was fighting for a much smaller piece of the ad pie.

Bottom line, if you are in an ecommerce market, you NEED to be paying for Google Shopping ads.

Google Has Moved Their Strategy from a “Sign Everyone Up” to “Make The Biggest Pay” Mentality

 

Another seismic shift that has been occurring for years is that Google has finally figured out that they don’t need more advertisers in the eco-system. Many moons ago, Google was steadfastly focused on growth, and saw agencies as a key partner in this process of acquiring new accounts. They focused tremendously on new advertiser acquisition.

 

Google’s focus is “helping” their top advertisers

 

However, in the past 3 years, they have made a much larger shift to focus on the “haves” vs. the “have nots”. They gave the top 3 advertisers in each vertical a dedicated account rep. These reps have the power to push those advertisers into advertising betas that give the advertisers a leg up against their smaller competitors.

They still have a huge area of their support business focused on “SMB’s”, which is laughable, as they don’t actually care about the smaller advertisers. They want the newer (funded) ones in, and they want SMB’s for local type keywords in, but they don’t actually care if you come in, or not.

 

Dear Advertiser, Google Doesn’t Need You, You Need Them

 

Their ads quality team has free reign to fire any advertiser who comes across their deck as “somewhat fishy”, simply because there’s no risk of losing revenue if they replace an advertiser. There’s dozens more advertisers who are ready, happy and bidding for that same position.

Google will tell you they separate the editorial/ads quality team from the rest of the company. However, in my experience, in the past couple of years, they’ve gotten far better at just letting go of advertisers. They truly don’t need you.

 

 

CPC increase is inevitable – Industries Mature, and the Dominant Players Win

 

When an advertising channel starts, it’s dirt cheap. Whoever owns the audience medium is desperate for dollars, and will take whoever comes. As that medium matures, and the true impact of that channel can be shown (and CEO egos start to look at those mediums), the bigger advertisers start spending more and more to keep dominance. They can afford to do this, as they can afford to pay more per customer, or even waste a lot of money, as long as some of that money drives incremental profits.

This is true of radio & TV. When they started, there were a number of smaller advertisers, mom and pop shops, who were able to take advantage. As the medium matured, ad spots got increasingly more expensive, as ad sales reps could cater to only the larger companies, who could afford more.

This is a reality in search as well. It’s a maturing (but not totally mature) market, and a lot of smaller advertisers are getting left behind.

 

Google is helping the process along through education – How Google Con(vince)s Advertisers to Pay More For The Same

 

As we’ve mentioned, Google can’t easily “force” the CPC’s to go up. This is a semi transparent auction, and unless your competition is willing to pay more, it’s going to be harder to get you to pay more for those clicks as well.

Even aggressive advertisers have little incentive to pay more for the same results.

Consequently, there’s a somewhat organic process to the rise in average CPC’s.

Google needs to be helping the industry squeeze more profit out of each click, or they need to“educate” them on how they are truly getting value (hence their investment in Urchin/Adometry etc.).

I’ll never forget, when one of my clients, who’s one of those “top 3 advertisers” in his category, came back shocked from a day at a performance conference hosted by Google.

He shared with me that Google wanted advertisers to focus on net profit instead of margin or CPA (how much more should an advertiser raise their CPC/CPA to get a higher volume of clicks/sales, where do they net the most profit?). He was stunned. “Google is telling me I should pay them and eat more margin, and that will help me??! The other advertisers as well were all murmuring,” he tells me.

I wasn’t surprised at all.

It’s true, the industry lags far behind current economics – often because our tracking and forecasting technology isn’t there yet, and other times because of corporate politics. So, we can’t yet overspend our budgets, and comfortably justify it.

That said, Google’s doing a great job of pushing the technology to track the lift from Google Ad spend far better.

Their recent addition of bid simulation columns to the interface/API is an effort at helping advertisers forecast profits better.

Sadly, the Yahoo/Bing teams are doing a far worse job, and it shows in their RPS vs. Google.

 

In the future, only the more sophisticated advertisers will be able to afford to play.

 

How Should Advertisers Respond?

 

Nothing significant has really happened in the market. This change just highlights shifts Google has been doing for years. If this has caught you by surprise, we’ll be outlining a bevy of strategies you can use to stay ahead of the curve. Stay tuned.