Yesterday I read a very interesting article by Mark Simon: Insider Data Trading (The Real Reason Keyword Prices Will Rise in 2008). This article discussed 2007 as a year of consolidation in the online industry, and specifically talked of the Big Three (Google, Yahoo and Microsoft) acquiring companies that make it possible for the Big Three to see specific web analytics data from the other engines.
After bringing everyone up to speed on these acquisitions, Simon conjectures that these paid search marketing heavyweights will use this data to manipulate the cost of buying keywords within their respective networks to make them more comparable.
The example provided was if a specific keyword buy in Google AdWords was $1 and the same keyword was being purchased for 50 cents in Microsoft adCenter, why wouldn’t MSN raise its price to be more closely aligned with Google’s going rate?
Simon ends this by telling us how there is little that we can do to stop this from happening. And that because all of these companies ultimately report to shareholders, there is little incentive for them to not take this approach.
Power of Profit
Although well thought out, and completely within the realm of possibility, I disagree with Simon that there is little we can do to prevent this from happening.
Yes, all three of these companies have an obligation to serve their shareholders, and raising keyword prices to increase the revenue brought in by paid search sounds like an easy way to do this, but would it really increase revenue in the long run?
All three of these companies rely heavily on the revenue brought in by paid search, and this revenue is generated by search marketers bidding on these terms.
How do search marketers decide what terms to bid on? They decide based on the terms that convert and create a profit for their company.
If I am bidding 50 cents for a keyword in Microsoft’s adCenter, am getting 200 clicks a day and happen to be converting at 4% – it would cost me about $3,000 a month to bid on that term, I would receive about 6,000 click-throughs and would sell somewhere around 240 products. Based on this, I would need to be making $12.50 on every sale to break even. If Microsoft adCenter suddenly bumped that price to $1.00, and everything else stayed consistent, I would now need to be making $25.00 on every sale to break even.
If I am only making $20.00 on every sale, I can’t afford to continue bidding on that term. As a result, I can either find a more targeted term, with a lower minimum bid to promote my product, or if that doesn’t exist I can explore another avenue all together.
As search marketers, we are essentially the stockbrokers of paid search marketing. By bidding against each other, we set the price for position. If that price gets too high, and no one is able to make a profit, why would we continue to bid? And if we don’t continue to bid, how can Google AdWords, Yahoo! Search Marketing, or Microsoft adCenter continue to run?