Monday, June 23, 2008

Google Adwords, Marketing Tool To Nowhere

Competition in the world of pay-per-click keyword advertising is over. Google completely owns it. Microsoft had a shot at becoming a player by purchasing Yahoo to combine it with but Monkeyboy Balmer punted that opportunity in frustration that his initial offer was not lapped up like mother's milk by Jerry Yang. Upon receiving the universal Sicilian sign of greeting from Balmer, Yang ran into the arms of Google as part of a quixotic attempt to keep Yahoo an independent company. Best of luck Yangster. Yahoo is toast.

But what about all of us small business owners who market on the internet? My suggestion is NOT to plan on Adwords being a long-term marketing tool for small business. Why? In an efficient auction market for ads dominated by one player, it's clear what will happen (if we are not already there): i.e., competing ad buyers will bid up the price of the keywords until there is zero profit margin left to the seller. Translation: only Google wins. The sellers / marketers get sucked dry of profit margin. Why keep advertising on Google if there is zero profit margin in Adwords? For many businesses, acquiring a new customer at zero profit margin helps given the potential for repeat business and to cross sell other products. For instances, say you are an online seller of womens leather goods. You bring in a customer through Google Adwords for a purse sold at zero profit margin. However, if you can sell this customer a clutch or other leather goods item, then you have profit. Further, this customer now is aware of your web site and may come back as a repeat customer without going through the medium of paid advertisement. Still, what percentage of customers will be repeat or cross buyers? 25% is a good repeat / cross sell percentage for any business. A seller who only generates gross profit on 25% of its sales is not one I expect to be in business long term.

In the days of multiple pay-per-click competitors, a regular cottage industry revolved around sifting through the various keyword sellers searching for cheap keywords. With just one keyword seller dominating the market, it's nearly impossible to find cheap keywords. Oh, it's not just that more eyes are now focused on the Google Adwords market. The "do no evil" boys have pretty much declared the cheap keyword to be illegal under Google law. How? Their system searches for popular keywords and slaps high minimum bids on said keywords. This means, should you be lucky enough to find a valuable keyword that your competitors have overlooked (and therefore underbid), it's impossible to scoop up the overlooked keyword cheap. The Adwords minimums on popular keywords are now stiff. Further, Adwords does not allow advertisers to differentiate in price between keywords within an ad campaign as was the initial standard set by (later Overture, later purchased by Yahoo). One bid price is set for all keywords in a campaign making it very difficult to cherry pick undervalued keywords for a low ball bid.

The Upshot. Google Adwords cannot be the central marketing strategy for any business. This is a problem for online businesses. How else does one market online? Well, I submit the SEO game is your main option. And that makes me uneasy. Google has a built-in incentive to frequently shuffle rankings and its search algorithm in order to insert uncertainty into the search optimization game. Why? It pushes sellers to Adwords. I wish Monkeyboy had swallowed his pride and stayed after the Yahoo deal. The Yahoo shareholders would have eventually put a gun to Yang's head giving us a true pay-per-click competitor for Google.


Steve Pohlit said...

I recommend and help implement a multiple prong marketing approach with all my clients. If there is a company sole relying on Google Adwords they are misguided.

In the pay per click world there continues to be an increase in the number of alternatives. Google may be huge and it is true large companies do some really amazing things in that arena but for the smaller nimble business really tracking ROI there are many ways to be smart when using Google PPC.

There will always be interesting market dynamics developing. As an example look at what is going on with Web 2.0.

I think you have valid concerns. However there are many ways to be smart about advertising. Actually I think there are more ways to be smart about advertising than there are ways to be opposite of that.

Steve Pohlit

Chris said...

You make a very good point, profits will become slimmer and slimmer as costs for PPC rise. But that is what an open market is meant to produce.

It is very much the same for any kind of lead-gen company or program. When they start, leads (for any business) may be a good value - but as more and more people and companies discover this offering, demand swells and the prices increase. Just to the point that the margin is next to nil.

While many industries could serve as examples of this - the auto industry (especially with current fuel prices) is a perfect specimen. said...

Doesn't every business do 80% of it's business with 20% of it's customers, the repeat customers? If so, then by all means make hay while the sun shines. If you can make a profit with Adwords, do it. Build relationships. Gain repeat customers. Use Adwords while you can. If and when Adwords becomes unprofitable, then stop participating