By: Ali Eghbaljoo
Recently I helped my best friend to set up her small business, and as part of it (and of course as I am a proud MBA student) I suggested her to leave her marketing campaign to me! During this journey, I learnt a lot and one of them is, if I care about someone then I shouldn’t click on their website’s links with little green Ad next to them on google search result! Why? Because it costs them and eventually, as the customer, I have to pay my share of their marketing expenses! Maybe a little bit difficult to believe, but by a simple click, you can cost someone up to $50! For example, if you type the word “car insurance” on Google search engine and then click on the link that is suggested by Google AdWords, it can cost them up to US$55! If you have never used AdWords, in a nutshell, it is Google’s paid advertising product. Businesses pay Google to appear on the top of the search result.
Why businesses are competing to be on the first page of google search result is obvious. More than 90% of searches on mobiles and tablets is done by Google and thanks to Microsoft and its product; Bing, it is a bit less on desktops, but it is still more than 70%. So undoubtedly Google is the best online platform for marketing for most of businesses.
As we know, price is how much a consumer is happy to pay for a certain product and service and it is subject to supply and demand. Google AdWords supply and demand model is somehow very special. As there is only limited amount of supply, the demand and supply graph is similar to Graph 1. The maximum quantity that google can provide is Q2, as there is only one page 1 and limited space on it.
Some keywords are price sensitive (Graph 1; D1) as the revenue that the business can generate by each customer is not high. The cost per click can be as little as 5 cents. For example, a coffee shop owner is not paying $20 to maybe get a customer directed to his/her shop by clicking on their website. So, the price is P1 while there are some other more aggressive keywords such as “credit card”, that are less price sensitive and they go for P2. If for any reason, there is a shift to the right in demand (for example peak season in hospitality industry will shift the demand curve to the right), then the price for the same product will jump to P3. But how google identify the price?
In a very simple language, for every single google search, AdWords runs an auction for all the potential candidate with the relevant keyword. “Auction consist of four parts; Players, Objects, Payoff participants, and Strategies” (Post, Coppinger and Sheble 1995, P1580). In AdWords example, players are the websites’ admins/owners and object is to be appeared on the first page. Payoff participants is vary for each winner of the auction, as there is normally more than one winner. Each winner is paying the next highest bid, for example if website A bid is $4, website B’s $3, and website C’s $2 and all of them have won, A is paying $3 and B is paying only $2. In terms of strategies, when the website admin sets up AdWords account, sets the maximum bid for each specific keywords. The website admin also identifies the strategy for the auction by choosing or changing location, language, time of the day for search, and other factors of the search that they want to participate. Also, google routinely provides daily information to firms on their performance, and advertisers typically manage their paid search campaigns on the basis of such data (Rutz, Bucklin, and Sonnier 2012, P306).
Compare to good old days, when Yellow Pages was the king, the world has changed a lot. 20 years ago, Yellow Pages couldn’t react to the changes in demand quick enough and had to wait for the next years’ version. However in today’s world, there is an auction behind the scene for every single google search to define the price for Google’s products. Now we are living in a world that is changing very fast and businesses need to evolve to react to changes to survive. Businesses needs to be able to offer different prices at any given time to remain competitive, otherwise they will be disappear for good.
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Post, D, Coppinger, S, & Sheble, G 1995, ‘Application of auctions as a pricing mechanism for the interchange of electric power’, IEEE Transactions On Power Systems, 3, p. 1580
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