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 AOL Only Adwords - Marketplace & Revenue Impact

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Number of posts : 842
Age : 30
Registration date : 2008-03-15

PostSubject: AOL Only Adwords - Marketplace & Revenue Impact   Sun 13 Apr - 17:11

So, if you havenít heard by now, AOL is receiving their own version of Google Adwords (Private Label deal).

Iím not going to rehash the background and deal info, referenced at SearchEngineLand, but instead, Iíll try to explain what I see the market impact as being.

Iíve long argued the point that we should be able to price keyword by partner on all the major search engines, as they all have quite different conversion rates and ďNot every click is created equallyĒ, to paraphrase. The AOL deal has forced Google to make this move, and I think it will probably hurt their margin numbers and not just their revenues. Overall, itís probably close to a zero sum gain as the money will flow to AOL, but their cut will just reduce. I havenít done the math, but they might be just slightly worse off on revenues, but definitely down on margin.

Also, this impact will hurt many of Googleís partner sites that relied on high conversions from AOL to ďslipĒ clicks through the door at higher than market value (respective earning or value per click), because of the fact that marketers cannot price each partner differently.

This is quite a complicated post, so please bear with me - Iíll try to explain this as simply as possible.

Currently, when buying Adwords ads, you pay a single price for a click & keyword that goes to Googleís distribution network.

For example (and Iím using hypothetical, BUT REALISTIC numbers here), letís say that a keyword received 100 clicks and the breakdown by partner is as follows:

25 Clicks from AOL - 5 Conversions
50 Clicks from Google - 4 Conversions
25 Clicks from Google Partners - 1 Conversion

Total Clicks = 100 x CPC of 25c = $25 in costs
Total Conversions = 10 divided by $25 in costs, leaves us with a $2.50 CPA (Cost Per Acquisition)
Assume an average position of 3 and as you can see from above, AOL has the better conversion rate.

Letís assume that your breakeven point is $2.50 CPA. Now, because Google runs a single blind marketplace, there is no price discrimination, which means that there is cross subsidization of keyword value (you pay an average price for everything, yet some clicks are worth more and others are worth less).

For the record, our logs indicate that AOL has the best conversion rate across all Google partners, and this simple means that if there is a separate marketplace for AOL, that prices across the Google Adwords network (especially direct) should fall, IN THEORY (see conclusions).

Now, letís assume that we removed the AOL numbers:

50 Clicks from Google - 4 Conversions
25 Clicks from Google Partners - 1 Conversion
25c CPC x 75 Clicks / 5 conversions = $3.75 CPA

By AOL moving out of the marketplace, this would effectively mean that the remaining traffic would become too expensive, because AOL would not be cross subsidizing it (and obviously, they know this already, and thatís why they want their own marketplace). This would mean that prices would drop in order to offset the drop in traffic quality.

What would this mean for AOL?

$2.50 CPA x 5 Conversions = $12.50 / 25 Clicks = 50c CPC - almost DOUBLE what Google was raking in for them by cross subsidizing, is what the merchant would be willing to pay direct on AOL, because of the higher conversion rate.

Now, here are the possible conclusions vis a vis Google CPCís:

1. Google CPCís will drop as marketers move their spend directly onto AOL and adjust ROIís according on Google. This will impact Googleís financials, as they will have to pay out a lot more money to AOL.

2. Google CPCís will increase as dumb money floods the market because marketers are either too lazy or overworked to load AOL campaigns (highly unlikely in the long term) and instead they make it more profitable for Google to show Adwords direct ads for AOL, than AOL marketplace ads. I doubt this would occur though, but itís a possibility.

3. Google CPC remain unchanged as AOL take-up rates are too low to impact the overall conversion number in the short to medium term.

So, logically speaking, by removing the ďbane of mankindĒ *according to me* (Cross Subsidization) from the Adwords system, we as marketers will be able to align ourselves far more closely with the value per click.

Where do I get this insight from? Well, as an affiliate marketer, we have to watch the earnings per click very closely. EPC is a key metric and we are also able to distinguish (using our proprietary technology) the different conversion rates and therefore effective EPCís per network partner for all the search engines. This data allows us to derive very accurate statistical models and also understand how the market is interpreted (well, as best as possible) by other players.

Every cent we spend is our own, so we have to ensure that weíre as closely aligned to value per click or EPC as possible, and therefore weíre very excited about the AOL prospects, but realise equally that itís a lot of work.

I think this is a great move by Google and I applaud them. Theyíve thrown the gauntlet down to the other search engines, and letís see how they respond!
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