
How Google Inflates AdWords Bids - veesahni
https://plus.google.com/104371975904409493484/posts/XFYfF1jujdE
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pdenya
In my experience Google required me to speak to a representative to claim my
$100 credit. I had already done research with the keyword tool and had a list
of keywords I wanted to use and the prices I was going to initially bid for
them.

The woman I spoke to used generic keywords instead of the specific keywords I
requested ("Necklace" vs "Bendable Necklace", etc) and set the per-click price
much higher than I requested ($3 vs $.15). She required that it was setup that
way "to make sure everything is working" and I could "change it later". This
burned through $21 of my $100 credit in about 1 minute.

So yes, Google is actively encouraging much higher spending with credits.

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joelrunyon
This isn't standard Google-fare.

Are you sure you weren't talking to a marketing consultant that was giving out
those coupons (Google gives those out to consultants like candy to sign up new
advertisers).

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adgar
I'm skeptical about this too. Especially since your parent poster seems to
imply he got Google on the phone with a $100 free adwords card, which everyone
and their mother has gotten at one point or another. I just got one from my
freaking domain provider for "loyalty" (2 years? Loyal? meh)

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pdenya
I don't know, I got it in the mail a week after checking out adwords but not
spending anything. It said Google on it and the person I talked to was able to
see and edit my account directly without me providing my password.

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joelrunyon
Interesting.

One way or another this is another example of "nobody cares more about your
money than you." Google reps for intro clients aren't always the most versed -
so double check everything.

$100 doesn't go _that_ far in Adwords anyways. It's always good to start small
and scale things up gradually, rather than blast it, run through your budget
and be back at square one.

You might have had a bad experience, but I highly doubt Google is actively
trying to screw small advertisers out of their free $100 credits by giving
them bad advice.

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patio11
This would be a mostly ineffective and impressively devious way to increase ad
bids when Google could just, you know, refuse to fill orders at prices below a
reserve price chosen to maximize their own revenue.

You know they do that, right?

AdWords is not an auction. AdWords incorporates an auction-like mechanic in
part of its pricing strategy. There are numerous other ingredients in the
secret sauce. We don't know what they are, but some of the public ones are
_explicitly chosen_ to make understanding auction mechanics less lucrative.
(That one is called "Quality Score", which is a wonderfully Orwellian coinage
for "Maximizing Google Revenue Heuristic.")

In an auction you are competing against other bidders. On AdWords, you are
competing against Google. In aggregate, Google is winning.

(n.b. I _like_ AdWords, but it would be an impressively bad time to assume
corporate fluffy-bunnyhood when managing one's AdWords account.)

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robryan
I have been wondering about that soft reserve value they have. Know of any
information online about how it is calculated? Been wondering without
competition on a keyword if there is some mostly common lower bound on bid to
be shown or does it fluctuate depending on the search term.

~~~
joelrunyon
It's fairly arbitrary. A lot of times they'll show random "first page bids"
that have absolutely no reflection on the actual bids it takes to show up on
the first page. That said, it doesn't stop them from trying to make you up
your bids in an attempt to grab more impressions :).

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OstiaAntica
I've used Google AdWords since it launched. In the past year, I've been locked
in a death spiral with the service. The cost-per-click has sky-rocketed even
as I dial back my bids and budget. I'm in a low traffic category so there's
nothing external going on....Google is getting better and better at extracting
every last penny of value from me.

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chalst
I've had a somewhat similar experience: I've been using Adwords for about 4
years and seen its cost skyrocket over the period from about 16 months ago to
about 11 months ago.

I was running ads of about Eur 130 per month, and let my costs increase to
over Eur 200 per month, to dramatically declining response quality. I reworked
my whole advertising strategy, and have cut my spend on Adwords to about Eur
40 per month, on just the most proven keywords for top positions.

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nhashem
I'm getting increasingly convinced that AdWords is basically a scam. I worked
on SEM optimization tools for two companies in the mid-2000s and ROI was
great. Then ROI started to erode as the years passed as other players in our
vertical entered our space, and as far we could tell, they were either a) just
spending to make a huge brand play or b) had some way to monetize 150% than us
because their CPCs were literally 150% higher.

My theory is that since SEM is often a separate unit from every other
marketing organization in a company, this is what happens: The SEM team sets
up an AdWords campaign, get great ROI on terms that contain their company's
name or whatever, and crappy ROI on everything else. But the campaigns as a
whole are ROI-positive, and because they're all being evaluated on that, no
one will ever suggest, "hey, I know our company name is Joe's Widgets and we
get great ROI on keywords like 'joes widgets,' but maybe we shouldn't buy that
keyword at all because anyone searching for that will also see us as the #1
organic Google result." Because if the SEM team did that then their campaigns
would no longer be ROI positive even if the company as a whole would benefit,
and working for unprofitable departments is generally not good for your
career.

Now I'm working at a company that's a major AdSense publisher and at least
once a quarter something happens where we get a huge clawback for "quality
issues we can't disclose," or we have to change our implementation, or
whatever. It's just totally infuriating and I've realized there must be a lot
of people like me who have basically spent their entire career being Google's
bitch on the traffic acquisition side or monetization side.

I'm not so worried about monetization, as there is more than one way to make
money from the internet besides AdSense. But as far as AdWords, I'm wondering
if there's going to finally be some sort of tipping point where the mid-sized
companies that have gotten squeezed out of AdWords find some other paid
traffic provider that isn't infested by a) huge companies just making stupid
brand players and b) small players blowing their $100 credit like what is
described by the OP.

What would such a traffic provider look like? They have to be search PPC
(again, lots of options for non-search paid traffic), they have to have enough
volume, they have to have the technology to combat things like click fraud,
and they have to be called something else besides Bing/Yahoo (which
unfortunately have all the problems Google does, except less volume and even
more terrible advertiser tools/APIs).

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AJ007
Adwords is an auction. Because other people want to spend more than you
doesn't make it a scam. And it doesn't matter why they want to spend more.
People that purchase newspaper and traditional television advertising don't
measure ROI because they can't.

I don't know how much credit Google gives out, but when a major auto insurance
company has blanket $100 per click bids, that $75 voucher's impact will be
measured far in to the decimal points.

The opacity behind Google's bidding system allows for fraud since they can
calculate how much each bidder needs to pay differently. Thus spot #2 may
actually be paying more per click than spot #1. In some instances, a
fluctuating baseline bid may have the same impact as shill bidding in a
traditional auction. Whether or not it is explicitly fraud, or a scam, if the
outcome is the same, regulators will likely carefully review the process in
any anti-trust investigation.

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jcampbell1
With the auction model, the spoils go to whoever has the highest margin, and
in my industry it is people doing reverse billing scams. I am not willing to
advertise a price of $9.95, and then charge people's credit cards $130 every
month after that, based on an agreement that is in low contrast and 11px
font.[1] You are right, that an auction model doesn't make it a scam, but it
does invite scams, and Google should be extra vigilant at policing the scams.

[1] <https://www.pimsleurapproach.com/special-offer/>

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AJ007
As long as it is an auction process, there is intense pressure on all involved
to extract as much value as possible from every customer.

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anon808
Agreed, that's the incentive. Now, whats you're opinion of that incentive? Do
you think its something you'd personally like to see more or less of?

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AJ007
My opinion is that it sucks, and there is not much you can do about it if your
business's marketplace pressures require extracting value rather than giving
it away.

Hypothetically, insurance is an extraction business -- pay out as little as
possible so you have more money than your competitors to pay out commissions
and advertise. Commodity product manufacturing works the opposite direction,
make and price your product for as little as possible so companies purchase
from you (and arguably, you are extracting that value instead from your
employees in terms of pay and safety.)

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amitamin
It would take a significant amount of free vs. paid in the system for there to
be a true inflationary effect, rather than small microcosms that are impacted.
We’ll all gotten free credits or know of people getting free credits, but
compared to the spend of real campaigns, I would say insignificant?

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jaredmck
It has to be - if there's billions being spent on adwords, even a million
businesses spending free vouchers would be only slightly inflationary.
Although perhaps this has more of an effect on smaller sectors which were more
brick-and-mortar based.

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fypomg
The effect of this one time gift is temporary. The obvious overall goal is to
gain longtime users, not short term gains by burning through free credits. The
overall effect resulting in raised bids for current advertisers is negligible.
Unless you have thousands of new adwords users opening up accounts, focusing
their free credits towards the same term that is already competitive, then
yeah, sure, ppc will increase a little.

You're running a small business, lets say you receive a credit of $100 to
start an adwords account. You'll see from the adwords campaign a noticeable
increase in traffic occurs, you can track phone calls from ad campaigns, and
observe click-throughs to emails/sales received from running campaigns.

Great. Then you increase your budget to $1,000 a month on adwords, watch as
pay-per-click supplements organic traffic that wouldn't otherwise be captured.

Beyond that, within the first month or so of having a new adwords account,
Google (with a live and knowledgable rep out of Ann Arbor) personally helps
you set up and optimize your campaigns (a service that predatory SEO and SEM
experts typically gouge small businesses on). All of this is for free to help
businesses understand how to use a tool that touches 65%? of users online.
Disgraceful. How dare Google make money and put you in touch with consumers
who don't know about your products or services.

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gojomo
Some basic microeconomics, with a simplified model that approximates the
Google AdWords auction, renders this not very surprising.

If an ad costs Google $0.01 to serve, but provides an advertiser $1.00 worth
of benefit, then possible prices for that placement are anywhere from $0.02
(providing Google with $0.01 profit and the advertiser $0.98 benefit) all the
way to $0.99 (providing Google with $0.98 profit and the advertiser $0.01
benefit). A price any lower and a rational Google won't bother to offer the
service, a price any higher and a rational advertiser won't bother to buy it
(modulo all sorts of approximation/measurement issues, of course).

Whether a negotiation converges closer to the $0.02 or $0.99 price depends on
many things, including hard factors like the number of
buyers/sellers/alternatives and soft factors like traditional expectations.

The situation Google faces – a near monopoly seller, and many competitive
buyers – is already pretty close to ideal for them to drive prices up to the
very edge of buyers' willingness to pay. It's hard for those buyers to
coordinate to keep their bids down, though over time they might via an
iterative 'flocking' process try to stop donating every extra dollar (or in
economic terms, the 'surplus from trade') to Google.

For example, if there are 5 highly competitive bidders, they might converge on
bids $0.99, $0.98, $0.97, $0.96, $0.95 to reflect their relative desire for
#1-#5 placement. But then starting with the person in 5th, they may iterative
experiment if they can maintain relative placement with lower bids. Bids of
$0.06, $0.05, $0.04, $0.03, $0.02 maintain the same relative order, leave
Google a tiny profit, but reassign most of the benefit to the bidders.

If the buyers were to meet to try to accelerate this process, they might run
afoul of antitrust law. If Google wants to have a meeting of its CS,
economics, and systems-research PhDs to brainstorm ways to drive up the
effective prices paid, they just need to reserve a conference room at the
Googleplex.

So there are a lot of features and policies of Google AdWords that serve to
nudge bids higher and prevent any flocking downward. 'Broad match' brings in
competitors from nearby markets. Opaque ad/page fitness scoring keeps
unsophisticated bidders guessing about the direct effects of their bid
changes. Google communications encourage buyers to state their maximum, start
high and work down, and donate to Google all the analytics/conversion data
that will help Google discover the maximum value a buyer is receiving.

Even throwing in a few unsophisticated/irrational/novice bidders from time to
time can also help: their overbids, until they realize their mistake, may help
push up the bids of other more efficient businesses, who were previously
collecting more of the benefit that Google could be capturing for itself.

Adding more people bidding with 'house money' (especially novice businesses
increasing the number of competitors), and the amount of blindly obedient
high-bidding and broad-match-bidding, helps on all these dimensions. Even if
Google AdWords reps counsel these new buyers against irrational bids, so that
the new bidders still receive some marginal benefit from participation, the
added value-extraction from prior bidders, now paying more, could offset some
or all of the promotional costs. And that's even before considering any
persistent effect via new customers or nudged-higher-bid-levels.

Any of the bidders are of course always free to drop out if they're no longer
gaining some benefit over not advertising at all. But the relative division of
benefits is changed in Google's favor: the promotional programs can be a
crafty, roundabout way of increasing prices.

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mmaunder
If the ads aren't limited to google's own properties, then this costs Google
68% of the total ad inventory that is shown on non-google sites, since that's
the rev share.

Are they limited to Google's own properties? I've never used free ads, so
curious. In a way that would help validate the theory, but the non-existence
of a limitation wouldn't invalidate it.

Interesting observation and I think it's probably correct about the
inflationary effect.

~~~
veesahni
The vouchers give me a cash balance on my account, allowing me to spend it in
any way I chose to. So no, they aren't limited to Google's own properties and
Google would have to pay publishers on their content network.

However, they operate with an unknown spread between the publisher payout and
the advertiser bids - not sure how they would handle payout in the case where
no real money was actually spent.

~~~
mmaunder
They've said their revshare is 68% in the past:

[http://adsense.blogspot.com/2010/05/adsense-revenue-
share.ht...](http://adsense.blogspot.com/2010/05/adsense-revenue-share.html)

It would require significant changes to their bidding and reporting
applications to fudge paying out less for advertiser dollars sourced from a
voucher. So I suspect they eat the cost and the net effect is an aggregate
boost in earnings.

~~~
joelrunyon
Vouchers give you a monetary balance in your account. If bidding on a display
network property, they would pay the advertiser.

However, if they're bidding on the search network, Google basically pays
itself.

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zandorg
I got a $45 voucher (in the UK; £30) and I spoke to a rep on the phone. He
said do this, do that, yet about 2 months later and my spent is £10 for that
period! I'm actually disillusioned because I'm not getting _enough_ clicks!

My theory is that Bing is taking more and more clicks away, so I'll have to
find another way of promoting my business/projects.

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joelrunyon
Another simple fix: Use Bing.

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JeffL
Is Bing worth using at all? I set up a campaign on Microsoft a few years ago
before it was Bing, but never really got any clicks out of (a few clicks a
month) using basically all the same key words and ads I was using on Adwords
and getting thousands of clicks a day there.

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joelrunyon
Depends on your vertical. Bing has about 15% share of search and with Yahoo
that percentage is around 30%. It's definitely worth exploring, but it is
worth noting that keyword match types are implemented differently so you can't
just copy/paste your campaigns over from Adwords like you used to.

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6ren
Well, if the price goes up, the other bidders should reconsider if it's
worthwhile for them. But I have to say that Google's business model is
brilliant:

\- advertisers bid against each other for top placement. It is absolutely fair
for the advertisers to compete with each other, and google cannot be accused
of squeezing them with higher prices - yet as a natural by-product, google
gets the _highest possible price_...

\- google provides a wonderful service to people searching the web, _for free_
\- how could you possibly complain about that? Yet, it has these enormous
revenues from advertisers. So, this is the old TV formula; but improved with
the auction above.

It's fair, it's helpful, it's enormously profitable.

~~~
Retric
TV commercials also used the auction model. Just look at how much it costs to
run adds during the supper bowl.

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gscott
I have gone from spending 6k on adwords to about 15k with fewer sales.. I have
done everything possible but there is no reversing the decline. My employer is
quite unhappy with me luckily 80+ percent of his business is not driven by
Google. I became adwords qualified, deleted all of the non performing
keywords, hired a $200 an hour consultant a favorite of Google's from the help
board, the website design is very professional, and keyword targeting is all
perfect for the business. It is quite depressing.

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kingsidharth
So people spending $100 bidding higher. Let's say $50/click will increase your
bid pressure? They will get 2 clicks and done. While regular bidders will stay
in for long.

I highly doubt google has more freeloaders than paying customers.

I am not sure how it works now but last time I got a voucher (last year) they
charged you for actual click and those $100 are just to get you started.

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tristanperry
A bit off-topic, but this is a good description of the good (if any) and bad
of quantitative easing..

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fauigerzigerk
_I strongly recommend looking at other platforms before spending more money on
AdWords_

I guess this last sentence shows why inflating prices that way cannot be a
deliberate strategy on Google's part unless they are over-confident quasi
monopolists, which I don't think they are (yet).

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lawnchair_larry
Sounds like a page out of the Goldman Sachs playbook.

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jarek
Would you care to elaborate?

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aneth
This is a great point. Seems even legally questionable to make people bid
against "fake" money although I'm not sure what law is being violated. Is it
legal as the seller in an auction to give out money to certain bidders, with
the obvious effect of raising the price at almost no cost to the seller?

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knewter
not give out money. give out 'bid-coupons'. money would cost them. this
doesn't.

