16 March 2006

The psychology and economics of AdWords

I'm sure that you are familiar with the algorithm that Google uses to determine the ranking of an AdWord - it is a composite which involves the click-through-rate and the cost-per-click. Google use this algorithm because it seems logically right to them:
  • a high click-through-rate must mean that the AdWord has high relevance to the people searching on the specific term - to be clear, they are testing the relevance of the Ad to the search term, not the relevance of the site to the search term
  • they assume that people placing AdWords want to drive the maximum amount of traffic to their site
At least one of those assumptions is wrong. Let's explore why.

Click-through-rate is impacted by a series of factors. I've been able to demonstrate to my own satisfaction that an Ad containing the same words can have dramatically different response rates. In fact, the words can be in the same order in a line, but the 2nd and 3rd lines can be transposed and the click-through rates can vary by an order of magnitude. If the click-through-rate is so sensitive to the structure of the Ad, the click-through-rate is at best a weak proxy of relevance (in its normal sense) since it so dependent on the way the Ad is written - 95 characters spread over 3 lines is a challenging copywriting task, all appearances to the contrary. Having said all that, Google is measuring relevance as determined by what the punters think, and the customer is always right. I'm not complaining that this bit of the algorithm is wrong, merely sensitive to cultural and psychological issues. The bit I'm absolutely confident is wrong is the other element - the objectives of the person writing the Ad.

As a marketer, keen to show the impact of my marketing investments I might be interested in high click-through. However, as someone who wants to include AdWords in my overall cost-to-sell analysis, I'm more interested in using AdWords to pre-qualify people before they come to the site. I want them to know they are visiting a commercial site that wants to sell them something of really high value at a fair price, not a site where they can download some free goodies. As a sales manager I am very happy to accept a lower click-through-rate, providing that it delivers the right kind of traffic to the site. That seems counter-intuitive to the boffins at Google, so the cost per click has to go up.

This post isn't to complain about the algorithm - there wouldn't be any point. I am simply highlighting that there are a number of tensions in writing an AdWord. Experimentation is key, and like so much of marketing and sales, you have to be obsessed with the overall efficiency of the process. You need to have a clear understanding of the cost per visitor against sales and the lifetime value. Spending money to drive traffic to a site is wasteful if the site is not structured in a way which efficiently converts visitors into value. You should also consider whether your AdWords should work harder at pre-qualifying the traffic they point to your site.

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