Google’s Paid Click Rates: Google Needs the Best Clicks

Google’s Paid Click Rates: Google Needs the Best Clicks
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More gnashing and moaning about Google’s paid clicks says Larry Dignan.  This is one of the factors that’s hammered Google’s stock prices as the world worries that Google is slowing down suddenly.  There’s been a lot of back and forth, and Google for its part say they triggered some of this by changing how things work to improve the quality of the click throughs for advertisers.  Tim Armstrong, Google’s president of advertising and commerce in North America has said:

“We have a clear drive that a consumer should see really good ads,” said Armstrong, speaking at a Bear Stearns media conference in Palm Beach, Fla. “The outside world looked at that change as not healthy for Google, (but) advertisers got increased conversion. For us we looked at that as a positive change.”

Google has also said they would compensate elsewhere, for instance by “dialing up” advertising on YouTube.  The latter remark is interesting in the wake of Marshall Kirkpatrick’s article that suggests YouTube dominates video even more than Google dominates search.

I’m not here to predict what results Google will turn in very shortly, but I am here to say that Google’s focus on increased conversion of the click-throughs is worthwhile.

Why has Google been so successful?  As I noted in another post, MySpace reports $10M profit on $500M in revenues.  Google, by contrast, got there on $80M in revenues.  It was wildly more profitable in other words.

Profit is a sign of market inefficiency somewhere.  In this case, the inefficiency is the gap between how well advertising with Google works versus advertising on MySpace.  In fact, Google was onto a far better mousetrap almost from their beginning.  Being able to eliminate an inefficiency in the markets let’s a company play the spread between the status quo and the new higher level of efficiency that they can offer.

Google’s move here is aimed at preserving or perhaps even widening that gap in how well their advertising works versus how well other’s ads work.  It’s an interesting chess move.  There could be several outcomes:

–  The market doesn’t care.  Google just gave up a bunch of click throughs for no gain.

–  It is a competitive response.  We’re not privy to how big the efficiency “gap” still is.  Ohers may have made progress closing the gap and this is a defensive move by Google to keep it open.

–  It is a prelude to price increases.  If Google has made the gap even wider, they have earned the right to raise prices because the ads are more effective.  With a tough economy, the volume may be down, so it may be important to be able to increase prices.

Profitability is hugely important, and becomes the primary factor in many endgames (the other being strategic value if you are not profitable).  Being unreasonably profitable has always been a Google strength.  We shouldn’t be surprised if they try to manage for continued profitability even perhaps at some expense to raw growth.

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Andrew Chen wants to know what it means when services like Alexa and Compete can be so wrong about Google and, “these same, somewhat flawed approaches are driving the decisions of media buyers in a $40B+ global advertising industry?”

As I told Andrew in a comment to the post, it means the quality of clicks really does matter.  Hence Google’s great results.  Hence their continued dominance.  Hence it’s hard to sell advertising if you don’t have an unfair click quality advantage.

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