Creatalytics by Matthew Burgess

For years, Google has been known to have algorithmic “dials” that it turns up or down, affecting the volume and price of traffic that advertisers pay for, thus hitting their revenue targets.

Over the last quarter, we advertisers have been witnessing such a dial being turned. Google is showing our ads much more broadly than in the past, increasing the number of views and clicks, and thus dollars spent. They seem to be loosening the relevancy standards on broad match keywords.

On Jan 22, Google will announce its earnings. As someone controlling hundreds of Google campaigns, with substantial monthly budgets, I have several reasons to believe the analysts will be stunned by higher than expected earnings.

I’m certainly not a financial analyst, so my comments should be taken with a grain of salt. For starters, I don’t know what the analyst expectations are for Q4, and I certainly don’t know what expected EPS have already been baked into the stock price. But I can say that as a substantial advertiser on Google, I see trends that make me want to hold onto my GOOG shares. I think they’ll surprise with better than expected earnings.

Here are just a couple of the reasons I say this:

1. Holding Steady in the Down Economy

I’m involved in a number of business verticals, all primarily promoted through PPC advertising on Google, and none are showing signs of being particularly beat up by the collapse of the overall US economy. Our conversion rates have held steady as the economy bumps and stumbles. We’ve seen some price elasticity issues that result in a lower than average sale price when users are given a choice between products of varying price. But conversion stays steady.

The effect seems to be like when gas got really pricey, many people still needed to buy gas, but they opted for the cheaper octane.

But overall, we’re getting a consistent, if not improving, ROI for our PPC advertising campaigns. So our expenditures on Google are as large as ever. We’ll take all the traffic they can give us.

Well, almost all the traffic. And this leads to my second point.

2. Broad Matching Gets More Aggressive

“Aggressive” is another way of saying that Google is relaxing its famed standard of relevancy.  In the last 4-5 months, we’ve seen waves of increases in broad match traffic (while not in other the match types) that suggest Google is testing expanded matching algorithms. We would see huge spikes in broad match keyword traffic, and most of the traffic had very poor conversion.

It seems that they are abandoning (or at least loosening) the exalted standards of relevancy to the user’s search intent and were testing a method of serving ads to a variety of search queries, thus letting performance dictate repeat ad serving on those expanded terms.

Though this was all in the search network, not content, it sure felt like they were bringing content targeting into search.

The problem with this for advertisers is that “performance” for Google means maximizing the effective CPM: getting paid the most for that ad inventory. And what performs well for Google doesn’t necessarily perform well for us: performance for us is, of course, conversion, average sale value, lifetime value, and ultimately, ROI.

But here’s why I think this is going to be a win for Google in the short term: advertisers are lazy.

In our firm, we have pretty snappy analytical systems in place to detect and correct for this kind of situation quickly. Most advertisers, as I’ve come to see, don’t. Or they do—they have tools for analytics, alerting, reporting, bid optimization, etc.—and they just don’t use them as well as they could.
Also, there are lots of new advertisers, which will compound this effect. The AdGooRoo Search Engine Update reports the Google first-page advertisers grew 58% in Q4. By comparison, this metric for Google was -0.67% in Q4 of 2007.

It will take a little while for most advertisers to catch on that this traffic is not producing. And by then, Google will have earned record revenues in Q4.

Longer term, this may end up being a win for everyone. Google seems to have already “productized” this match testing in the form of “Advanced Matching.” It’s a feature that they promote as a way for advertisers to get seen by more traffic. And like I said above, we’d love to take more traffic. Please. So long as its quality.

And this is what they claim to do with the Advanced Matching feature, which advertisers can turn on or off. We’ve tested it a little, and I’ve not seen anything definitive one way or another yet. Jury’s out.

Regardless, what’s been happening in Q4 is definitive, in my mind. Google found a way to significantly increase its ad inventory, and to fill it. So I’m holding my GOOG.

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Google PPC by Matthew Burgess