On October 18th, 2012, Google’s Q3 earnings report was leaked early and the stock dropped 9% in hours. It happened so fast that trading was temporarily suspended. The following week, Larry Kim of Wordstream published research into how Google is earning all that revenue via an infographic, titled “24 Hours in the Google Economy.”
Larry Kim is the Founder/CTO of WordStream, provider of the AdWords Grader and the 20 Minute PPC Work Week. (You can follow him on Google+ and Twitter.) I reached out to interview Larry on what stood out to him:
Google stock took a nose dive when their financials were released. A lot of coverage mentioned decreasing CPCs. Does the decrease in CPC concern you?
Larry Kim: Google’s revenue growth has historically leaned a great deal on rising cost per clicks. The challenge with that approach is that it’s not a sustainable long term strategy.
Take for example something like domain name registration. How the heck can you justify paying $10+ per click for something that costs 5 bucks? Moreover, where the conversion rate from click to sale is in the single digits? (Answer: You can’t.)
I work with small and medium-sized businesses with limited search marketing budgets, commonly in the range of $1-25k / month. Rising CPC’s often force smaller businesses to respond by adopting increasingly narrow ad targeting parameters, and sometimes even result in them dropping paid search all together.
The reversal of this trend as a win-win for both AdWords advertisers and Google. A larger available inventory of impressions, combined with lower average CPC, means that PPC advertisers are now literally able to get more customers for less money. And Google shareholders should be happy, too – it opens up Search Engine Marketing to more advertisers, including perhaps advertisers for whom the economics of search might not have previously worked out at higher average costs per click.
I recognize that CPC’s aren’t fully controlled by Google per se – that an advertiser’s actual cost per click is a reflection of an ad auction that takes into consideration advertiser competition for a keyword, as well as an advertiser’s historical performance track record (Quality Score).
But overall I’m very supportive of a model for Google advertising revenue growth that that emphasizes growth in ad inventory, and innovations that drive and/or reward high click-through rates and conversion rates as opposed to just relying on higher CPC’s every quarter.
This approach deliver more ROI to advertisers in the long run and makes paid search a much more sustainable and attractive venue for ad dollars, especially in comparison to other advertising venues.
How do you feel mobile search is playing into these statistics?
Larry Kim: Wall Street analysts are placing the blame for slowing ad revenue growth rates squarely on mobile search. The conventional wisdom says that mobile ad engagement is lower in comparison to ads on the desktop, which intuitively makes sense –when you’re doing a Google search on your iPhone, you’re probably on the go, and therefore less likely to be tempted to click on ads that aren’t absolutely critical to what you’re looking for at that moment.
There’s also considerably less space for ads. These issues impact Google revenue growth as mobile searches account for an increasingly larger share of searches – mobile search volume is expected to exceed desktop searches in 2014. I think the conventional wisdom is true but would argue that there’s another factor playing into the statistics here.
Despite 2012 being yet another “Year of Mobile Search,” I’m finding that advertisers are quite slow to adopt mobile advertising best practices. In AdWords, all advertisers are automatically opted into mobile search – it’s the default setting when creating a new ad campaign. But the vast majority of advertisers aren’t creating unique or compelling advertising experiences for mobile searches.
For example, I’m seeing anemic adoption rates of new mobile ad formats, like click-to-call ad extensions, or call reporting, and very few advertisers take the time to create mobile landing pages, or customized ad text and offers that would be more compelling for the average mobile searcher.
The challenge is that it takes more time and effort to do the work – and I’ve also seen cases where advertisers have taken the time to optimize their mobile ad experiences but are having challenges measuring the ROI from phone calls, and therefore having trouble getting buy-in from key stakeholders.
In summary, the net impact of all of the above is that the typical mobile search currently monetizes at roughly half the value of a desktop search. But I expect that to change in the near future. For example, I anticipate seeing a lot more ads on Google Maps, and for Google to charge for Google business listings, etc.
Do you feel the CPCs in some verticals prices SMBs out of the PPC game (i.e. Finance)?
Larry Kim: In my study, the finance category included businesses doing credit & lending, financial planning & management, insurance, investing, etc. These tend to be high-margin businesses with long average customer lifetimes, for example a 30-year mortgage or life insurance policy.
Furthermore, the average conversion rates for the finance industry were very high – 6.12% for Google Search and 5.12% for Google Display Network – probably because a lot of people do comparison shopping for these types of products on Google, so I think it’s still a pretty effective advertising venue, despite the high average cost per click.
The industry verticals that are under the most pressure at the moment are those that have a combination of high average cost per click and low conversion rates (meaning, a high cost per action) in combination with tight profit margins and/or shorter customer lifetime values.
Since I don’t know exactly what the profit margins and average customer lifetimes are for each industry, I’ll just post the average cost per action data that I calculated, and let the readers decide if they’re too high or too low to make sense for their business.
|Industry||Avg. CPA from Search (USD)||Avg. CPA from Display (USD)|
|Jobs & Education||$29.56||$16.27|
|Internet & Telecommunications||$17.70||$4.66|
|Computers & Electronics||$29.02||$14.86|
|Business & Industrial||$39.48||$23.66|
|Home & Garden||$34.39||$24.20|
|Autos & Vehicle||$22.61||$16.75|
|Beauty & Fitness||$24.34||$44.49|
In my 10+ years of experience working with over a thousand small businesses, I’ve found that almost any kind of business can make PPC work for them – it’s mainly a matter of finding the more narrow set of targeted, relevant, high-intent keywords that drive affordable leads and sales.
What is the best way for an SMB to use this data now?
Larry Kim: There’s a ton of data here, and way too many insights to list them all out, so here are my top 3 ideas:
- What can I expect to get from search marketing? This is the first question that every advertiser who is new to search asks me. While individual results always vary, by looking at my industry benchmarks for your industry, you can get a general sense for what you might expect to achieve should you invest in search engine marketing.
- How am I doing in search? This is the first question that every existing AdWords advertiser asks me. That they know how they’re doing in that they see the metrics in their own account, but don’t have a way to gauge if those numbers are any good or not, relative to the competition. Again, by looking at my research, you figure out if you should be patting yourself on the back or working harder on optimizing your account.
- Try out Google Search and Google Display Network. My study found that there was a huge increase in clicks and a decrease in average cost per clicks. I also found that performance on the Google Display Network to be quite very compelling. If you’ve tried them in the past and stopped for whatever reason, I think it’s worth taking a second look.
Finally, a neat way to make all of this data all of this insight is to run a free AdWords Grader report. It’s a free, instant audit of you’re the key metrics in your AdWords account – highlighting areas of strength and areas to improve.
The neat thing about this free tool is that it compares your results to other advertisers who are in the same industry as you and have a similar ad budget as you, so overall it’s a pretty compelling benchmark. Plus it’s completely free.
Where do you feel SMBs still have a PPC advantage over larger advertisers?
Larry Kim: With such huge increases in available clicks and impressions, it’s no longer possible for larger advertisers to buy out the entire available impression share – this which opens up tremendous of opportunities for smaller advertisers to outmaneuver larger advertisers.
Don’t assume that all larger advertisers are doing great. I’ve seen plenty of large advertisers that do very poorly and are doing a terrible job at managing their accounts. And it’s not that they’re incompetent (though, that is sometimes the case) – it’s most often the case that there are legitimate challenges in operating a PPC advertising account at scale, like managing thousands of products, and inventories, and changing prices, etc., which are challenges that smaller advertisers generally don’t have to deal with.
Furthermore, necessity is the mother of invention. Sometimes, I see that it’s the cash strapped small and medium sized businesses that are running the best campaigns because the money is so critical for them, that it forces them to be more effective. Overall, it varies.