
The declining profitability of Google Adwords - hermitcrab
http://successfulsoftware.net/2013/05/26/the-declining-profitability-of-google-adwords/
======
jmotion
I spent $100,000 last year on Google AdWords - it made me some decent money.
The costs kept getting higher and higher - I called one of there advertising
rep's to give me advice - it cost me around $600 losses in 1 day. Called back,
made changes - told them I don't want to take 'risks' like that again. I then
tried this 'Enhanced Campaign' feature that I think they're bringing in across
all accounts in June - it put me in the negative and I'm now no longer
advertising with them.

This part hit the nail on the head: "(suggesting ridiculously high default
bids, goading you to bid more to get on page 1, not showing your ad at all if
you bid too low – even if no other ads appear etc)."

Every time I'd call they'd say up your 'Cost Per Click'. Every single time.

~~~
wwwong
I've been doing SEM for five years and worked with the full range of google
reps.

Quite simply, don't ask reps for advice on a product they've never actually
used (as in, with real money). You're better off investing in a proven SEM
expert in your field.

Also, the answers/responses from Google reps are basically read from a
training manual.

~~~
digitalengineer
I've just google'd SEM expert and not hits. Google suggests 'SEO expert'.
Could you elaborate about SEM? I'm interested.

~~~
wwwong
Happy to elaborate? What would you like to know?

As for finding an SEO/SEM expert, typically best to go by referral. Most
SEO/SEM experts that you'll find on google/forums will run you through
templated best practices.

Best to work with someone who has been vouched for.

------
bobsy
Seems like the article is only showing half the story.

Costs are going up which means increased competition. Increased competition
will mean your ads are running against more competitors. Reason for fall in
click-throughs could be under-optimized ad's losing out to competition's ads.

As for conversions. Looking at the table plan site I feel overwhelmed. If this
is where the ad's are taking users I think it is fairly obvious why sales are
dropping off.

I don't think Adwords can be blamed for the profitability of a product.

This isn't to say Adwords isn't declining in value for site owners. To make
this claim though you would need information from lots of sectors from lots of
site owners.

~~~
NKCSS
I agree; the site for the software looks terribly out of date, which in turn
doesn't instill confidence in potential customers.

Updating the site would be his best investment.

~~~
joering2
Updating site wouldn't make a dent. You seen Cragilist recently? or even
Google homepage for the last 10 years??

People go to his website for a certain product. They couldn't care less how
the site looks. Does crappy look of Apache software website turns you down
from getting the newest download? How about PHP site not updated since 1999.
Does their crappy site means they don't know their craft?

After checking couple tabs (that are easily accessible) and being convinced he
knows his business, there is nothing more to do than either pull the trigger
and buy a product/try it, or leave the site. No fancy graphics or frameworks
will change users' mind. And they shouldn't. In fact, if that site would be up
to date designed website all nice and clear, I would immediately think its a
scam or probably software with built in backdoor, etc.

His site is fine. He is selling table planning software (that looks decent),
not a web design lessons.

~~~
wwwong
Why wouldn't updating the website make a dent again? Landing page optimization
is a huge forcus for any online commerce company because updating a website
(design, content, flow) does make a dent.

~~~
joering2
okay I am talking about the outlook, not landing page optimization and the
stuff under the hood.

sorry but his website talks to me: "hey I seel software to plan tables and i
know how it works, but i am not a designer and wont spend money for a coll
website". which is fine with me. again, I didnt came there to appreciate his
website apperance but to see if his software is good enough for me (had I been
in the business that needs his software)

~~~
joemoon
You're taking your own opinions and applying them to the entire target market.
Just because you feel this way doesn't mean that everyone else does, and it
certainly doesn't imply that "updating the site wouldn't make a dent".

------
geetanjalityagi
The OP probably needs to optimize his ads (i.e. tune them) and the conversion
funnel. In my five years of working at Google as an AdWords manager (I don't
work there anymore), I've seen cost-per-click and bids rise consistently
especially for Google search. This has a lot to do with competition and
limited real estate. However, Google maintains something called Quality Score
which is analogous to page-rank that determines the bid required for an ad to
show. Quality Score is based on the keyword - ad text - landing page
relevance. With a high Quality Score you can get clicks for a much lower cost.
Some experiments put this at about 5% per unit of quality score change
(Quality score is on a scale of 1 to 10).

Low quality score is also a reason your ad might not show even if there is no
competition – Google assumes that the relevance of the ad is low, and tries
not to show irrelevant ads to user, even if it means not showing any ads. Of
course this is not fool proof, but that is the idea in general.

Getting a click is only half the story. Actually getting the user to convert
and buy your product depends as much on your ad as it does on your site. Is
your keyword related to your ad? Does the ad landing page offer what the ad
text promised? How easy is it for a user to buy your product or, convert? How
many steps does it take to get to your thank you page? Is your sign up process
too long? Most people tend to focus too much on bids and ignore optimizing
their ads to improve relevance of the keywords to ads and relevance of ads to
their site. Doing this can help increase Quality Score which significantly
brings down cost per click. It comes as a surprise but small tweaks can make
huge differences - and increasing bid or cost per click is not the right
answer in most cases.

Plug: I'm one of the founders of Optmyzr (<http://www.optmyzr.com>) and we
offer optimization services and automated tools for optimizing AdWords
campaigns.

~~~
JimWillTri
Can you give an idea of how much lower the cost per click could be with a very
high quality score (ie 5% of Googles suggested cost per click)?

"With a high Quality Score you can get clicks for a much lower cost. Some
experiments put this at about 5% per unit of quality score change (Quality
score is on a scale of 1 to 10)."

~~~
geetanjalityagi
As I understand from your question, there are two things here one is average
cost-per-click which is how much you actually pay for each click and this is
usually lower than how much you bid (max CPC). I've seen avg. CPCs fall by 10
- 50% (depending on the industry) when Quality Score changed from 5 to 7 for
keywords. You can actually track Quality Score and overlay it with avg. CPC
and other stats to see a correlation for your account. We created a tool for
doing this. The second is Google's suggested cost per click which is the
recommended first page bid that Google shows next to each keyword. This is a
function of your Quality Score and competition. You'll notice that keywords
with a low Quality Score have a relatively high required first page bid.
Please feel free to email me (geetanjali att optmyzr.com) with any questions!

~~~
JimWillTri
Thanks very much for the detailed answer. That really explains things from
Googles perspective. Very nice service you offer. I think that it will serve
to save people a lot of money on Adwords.

------
avimeir
In my previous gig we used to spend single-digit millions/year, and saw all
metrics falling down like OP did, and we had a team of 6 experts with tons of
experience in AdWords.

Not sure about this vertical, but in other (much more lucrative) ones such as
travel, Google is pushing its own solutions at the expense of other websites.

For example, try looking for a hotel in new york and you will see Google Hotel
Finder results, Google Map (which feeds from Google Hotel Finder), Google
Places for Business, etc. Google Map will even stay fixed meaning that as you
scroll down the ads are hidden by it.

There's much less value in positions that used to be profitable, especially 4+
(right-hand side ads).

~~~
enjo
Seeing similar in home-services. Plumbing, electrical, etc.. have steadily
risen over the last few years. We have highly optimized ads pointing to highly
optimized sites (better than 30% conversion to phone calls). In the end we're
rapidly being priced out.

We saw it coming, thankfully, and have been moving to a broader advertising
strategy which is working well.

~~~
avimeir
Do you mind sharing what's working for you these days? which channels? Do you
do offline also? Would make sense given your vertical..

------
programminggeek
There is a very simple reason for this happening - Google needs to keep making
more money, so over time they need to raise advertising prices or increase
click volume. There isn't going to be a dramatic increase in click volume
anytime soon, so for Google to grow at 20%+ a year, they need to raise prices
over time, which they do via quality score and social engineering.

I've watched Google do this relentlessly since 2006. They are quite good and
the fact that people in here are blaming the advertiser for not managing their
account well is proof of how good Google is at social engineering their way to
profits with AdWords.

~~~
monkeyspaw
Can you explain more what you mean by QS and social engineering being the way
Google is raising prices?

My understanding is that AdWords is a an auction system, where your position
in the auction is a combination of your Max bid, inventory, and a QS multiple.
If Google is manipulating QS, it would just change the ordering of auction
winners, rather than overall CPC, right?

My first thought was that prices are rising because 1) more competition on the
ads [more companies, higher prices], and 2) as a kw cost/value saturates, more
companies were "overpaying" [bidding more than expected ROI], due to any
number of causes.

~~~
programminggeek
AdWords started as a pure auction system where to rank higher it was basically
CPC * CTR, which maximized profit in a simple way for Google and it worked
well. The problem is that some people are too good at getting high CTR ads, so
their CPC's got too low.

What Quality Score does is it adds a layer of indirection to the system where
they can tweak some invisible dial so to speak to increase the "quality
threshold" for ads. Google will tell you what each keywords QS is, but it's
not as explicit as it could/should be as to why.

The point of QS is to enable Google to maximize profit while maintaining a
decent user experience, but the problem is, at any point Google can turn the
knob of QS and increase their ad rates. If Google needs to make more money,
they can drop QS and people will bid higher to rank higher. Or, new
advertisers who aren't very good will bid the "recommended" bids of $2 or $3
per click, where in the pre-QS world, those numbers were less than $0.50 in
most cases.

They also can use QS to make you redesign your pages to be more what google
wants, even if it doesn't increase your conversions or align with your goals.
Google totally can and does dictate what kind of pages you can advertise and
how you can advertise them.

So it's not just a auction system. It's much more clever than that. It's more
like if eBay auctions had a bidder quality rating where you would have to pay
more if your bidder quality score was too low.

------
Systemic33
I'm actually quite impressed that people earn money from these advertisements.
I have never clicked one of the adverts, unless it was the top result on a
Google search for the thing I was actually looking for. It's like a natural
instinct to ignore the ads.

With the rise of addons like AdBlock Plus, I think it's inevitable that this
Ad-venture (pun intended :P) will decline, and cease to work, until a new
medium or method emerges(Social networks, website-product-placement, etc)

~~~
jyap
Watch an average user browse the web and use Google to make a search.

They will click on the top ad result returned if it is vaguely relevant and
not bat an eyelid.

Average users do not even know those yellow sections or the right hand section
are ads.

The natural instincts of geeks <> The natural instincts of average users

~~~
wpietri
Yep. My cofounder did a ton of user testing. One guy, as he was doing a
shopping-related search on Google, said, "You want to know the secret of
Google? Ignore the left side of the page. The good stuff is the little things
over on the right."

------
antr
I don't believe this post tells the entire story. Adwords (advertising in
general) is just one part of doing business in general. Other reasons that
might explain the trends showcased:

\- Businesses have cycles, maybe the author is experiencing the end of his
software's business/product cycle. An 8 year period is considered by many an
economic cycle. I certainly don't use the same software today as I did 8 years
ago.

\- During the past 8 years the business of software has completely changed:
distribution, barriers to entry, platform (desktop/web/mobile), etc.

\- Profitable businesses tend, over time, with no meaningful reinvestment,
r&d, etc, produce marginal profits equal to zero.

\- What are the software alternatives to the author's product/service? 8 years
ago Encarta was "the" digital encyclopaedia, today it's Wikipedia.

\- Adwords 8 years ago was a nascent ad platform, resulting in low cost due to
low competing bids, today it's "the" most popular online ad platform.

These are just a few reasons behind these trends. Any other thoughts?

~~~
lovskogen
Maybe the shift towards web apps has turned potential users away from desktop
apps like the one mentioned.

~~~
tonyedgecombe
I don't think he said his sales were flagging, just that Adwords was becoming
less profitable.

~~~
cbr
He said "conversions" were falling, which means sales:
[http://successfulsoftware.files.wordpress.com/2013/05/adword...](http://successfulsoftware.files.wordpress.com/2013/05/adwords-
conversions1.png)

But he doesn't say whether conversions-per-incoming-click are declining.

~~~
hermitcrab
CTR and conversation rates have remained pretty constant throughout.

------
beambot
First, this has nothing to do with Google's profitability re:Adwords (the
title was a bit misleading).

Rather, it seems like an efficient supply-demand market is converging to a
price point that renders his ROI to neutral-or-negative. I guess that
indicates that the rest of the world is catching up in SEM... and it's time to
search for alternative marketing channels. This should come as no surprise --
golden geese don't live forever.

~~~
BenoitEssiambre
Exactly, it could actually show an increasing profitability of Adwords overall
but skewed towards products that are best suited to this kind of ad thus
pricing others out of the system.

------
dools
I agree that without maintenance an AdWords account will exhibit this kind of
decline, but it appears to me as though the OP might not be bidding on exact
match search terms which can make it difficult to control your spend and
target your audience. If most of your spending is on broad or phrase match
keywords then you're far more susceptible to changes due to other people
coming into the market place and also have much less ability to optimise your
ad text and landing pages to get the best ROI.

In my experience the single biggest improvement you'll ever see to your
campaign comes from bidding only on exact match keywords that you've extracted
from the search term report with ad text written specifically for those
keywords. It's a pretty laborious task but the results can be pretty
phenomenal.

------
_k
Costs go up because of competition. Costs go up because Google gives a $ 100
for every new Adwords customer, this inflates the prices. Costs go up because
there're more ads, not just on the right side. People are less likely to buy
when there's a recession.

------
AJ007
Please bury articles where people claim facts without providing a single
number.

We don't know how many total clicks this involves, did the clickthrough rate
drop 1%, 5%, 90%? Was the traffic search, search syndication, content? Where
there content text ads, image ads, flash ads? Did he ever add new keywords,
ads, geographic markets? Did he ever change the landing page design?

I would be very embarrassed if I wrote that blog post.

~~~
wpietri
I'm entirely ok with this. He really doesn't want his competitors knowing the
numeric details of his business.

He explained his methods and gave useful graphs.

Yes, the article could have been more useful. But the way to make that happen
in the future isn't to bitch endlessly about people not doing enough free work
for you. It's to thank them for the good you got out of it, and politely
suggest next time that their article could be even more valuable if they did
X.

~~~
bqe
However we could still discern a great deal from the data given in the graph.

[http://www.evanmiller.org/how-to-read-an-unlabeled-sales-
cha...](http://www.evanmiller.org/how-to-read-an-unlabeled-sales-chart.html)

------
pioul
I expect the Adwords ecosystem to auto-regulate itself instead of just
deteriorating over time: the more people like you realize they have to pay
more for less, the less they'll do so, leading to a decrease in prices until
they're acceptable (profitable) again. Supply and demand, like you said.

------
6ren
From the linked [http://andrewchen.co/2012/04/05/the-law-of-shitty-
clickthrou...](http://andrewchen.co/2012/04/05/the-law-of-shitty-
clickthroughs/#)

    
    
      When you are marketing with useful information, then CTRs stay high.

------
robryan
It is hard to split out the effects that are leading to a tougher Adwords
market in general and this particular campaign.

One thing we have noticed about Adwords is that longer campaigns are being ran
as essentially residual income with maintenance the more they decline. Thing
like bids, keywords, ad text can progressively put you in a worse place than
the competition left unchecked. I addition over the years we are getting
bombarded with new Adwords features that your competition is likely across.

The other thing I would say is that from first glance your software and site
design may be the cause for the decline. People are used to the instant
gratification from a web app vs having to download, whereas when you started
people wouldn't blink an eye at having to download software. The trend these
days is to pair you landing page down to the key point and call to action.

The good thing about all that is that there is probably a lot you can do with
landing page A/B testing and possibly on the ads themselves to turn it around.

~~~
kybernetyk
> People are used to the instant gratification from a web app

Which people? The 1% inside the tech bubble?

Outside of the tech bubble people still download stuff. And smart phones like
Android and iPhone with their downloadable apps don't really condition people
to use web apps.

If you want to make bold statements about the software market take a look at
the people outside of your tech savvy peer group.

~~~
robryan
I guess we will have to agree to disagree. Here is a good article on the web
app vs downloadable: [http://www.kalzumeus.com/2009/09/05/desktop-aps-versus-
web-a...](http://www.kalzumeus.com/2009/09/05/desktop-aps-versus-web-apps/)

I don't have an stats but from watching regular people use computers I
absolutely believe that people are much more willing to give something a go if
it involves clicking a button on a web page rather then downloads and
installers etc.

------
yesplorer
I used to be wonder if anyone really made any sales on those ads because even
as less savvy as i was with internet, I could readily identify 'ads by Google'
and not click them. Honestly, sometimes I could just look at the website and
type the address in a new tab instead of clicking on the ad( because I wasn't
going to make a purchase anyway so why make them pay for my visit?)

But then I observed first-hand how people I thought should know better were
clicking on these ads _unknowingly_ thinking it was part of natural search
results. So here's what I'm thinking; it could be because there as more and
more people get online, there's going to be more and more people clicking on
ads unknowingly thinking it's part of their natural search results, which will
consequently result in increase in CPC .

But what irks me from the post is: > not showing your ad at all if you bid too
low – even if no other ads appear If this is true then it's really evil!!

------
capnfabs
I'm wondering if it's got something to do with saturation on the demand side.
I'm going to take a (roughly) economic angle...

When AdWords first launched, it wasn't (necessarily) a standard for online
advertising, and especially for advertising generally. As more businesses
consider it to be part of basic strategy, the cost of your bid goes up to
remain profitable.

The previously obtained performance is the anomaly - it's a first-mover
advantage on a new technology. You get more bang for your buck because you're
making use of an asymmetry in the market-place.

The phenomenon that's occurring here is commoditisation - Adwords is well-
known and well-used; it's a standard. The competitive advantage that comes
from its use has finished.

------
csdreamer7
The title seems misleading to me. I thought Adwords was losing it's
profitability to Google.

~~~
cjmb
If the OP's premise is extended to all others in his peer group, I read this
as the implied "long-run" outcome. Whether that's true or not is another
argument...

~~~
michaelt
If the problem is that he's getting a worse return as people are outbidding
him for the best words/placement, it could be the opposite.

~~~
csdreamer7
agreed

------
eCa
Graphs are less useful without scale.

~~~
spindritf
It's against Google's ToS to share detailed data, I believe.

~~~
cbr
Really? Cite?

------
gingerlime
This resonates with me pretty well, even though I don't have such long
experience. However, my wife has a small website selling vintage items to
Japanese customers, so we have some experience with online advertising over
the last couple of years.

Apparently, Google isn't as strong in Japan as Yahoo. At least for the
demography that reaches my wife's website over the last couple of years. We
see this quite clearly on (organic) site visits.

Given this, I would assume that advertising on Google would be cheaper than
Yahoo Ads in Japan. However, it's not the case. Google adwords are far more
expensive and deliver far worse results for the same campaigns. Maybe
competition in this niche is not well informed/stupid and uses Adwords more
than Yahoo, which drives the price up, but to me it doesn't make sense. If
Yahoo gives better bang for the buck (and it does!), then advertisers would
naturally shift there, which would raise the Yahoo price, and reduce Google's.
However, that does not seem to be the case. It feels like Google is somehow
inflating the prices not completely in line with supply/demand.

------
MarkMc
I've been experiencing exactly the same problem. Used to make thousands of
pounds each month from AdWords ads, now just about break even on them.

------
veesahni
Another aspect of this is Google's inflationary tactics that continue to rack
up rates. I had written a post on this: <http://www.vinaysahni.com/how-google-
inflates-adwords-bids>

Their inflationary game has still not ended. This week I got a coupon in the
mail for $200 AdWords credit if I spend $50.

~~~
megrimlock
Hey Vinay -- I just wanted to remark that supportfu.com looks great. Even
though I'm not in a business where I'd need such a thing, I found your copy
compelling enough to imagine myself running such a biz and how to provide the
best possible support, and concluded that I'd want something very much like
what you offer. Best of luck.

~~~
veesahni
Thanks for the kind words :)

------
kposehn
To some degree the OP is right.

A static campaign, sending traffic to the same landing page, not increasing
the bids to account for changes in CPC, will be less successful than before.

Over the last several years, the barrier to entry has dropped but the barrier
to success has risen extremely high. It is much more difficult to profit when
most of your competitors are using every tool at their disposal to crush yo.

The two things that could easily make/crush his conclusion is average position
and quality score. I want to see the average position on search and quality
score over time as that will indicate:

1\. If he has not kept bids in line with the market 2\. If his site has
continued to be updated with sufficient fresh content to appease the googlebot
3\. If he has continued to improve his ads (CTR is one of the components of
quality score!)

Those things will indicate where his efforts have fallen down.

------
cynwoody
So, just for fun, I googled "event table planning". No paid ad for his app
appeared.

However, a quick scan through the first page shows he did get at least three
freebies: two of the four image results are screen shots from his homepage,
and the second search result is his site and includes a to-the-point abstract.

------
evolution
Standard economics. As you start penetrating potential audience its going to
get saturated after some point until you reach all of the audience. As
impressions to get one more click are needed more, google needs to exhaust
their inventory more. Apparently CTR is going to degrade, and google will
start increasing marginal cost per click. Cost per click is curve is often
going to be marginal cost curve, where maximum profitability is at lowest
point on the curve. Its not about profitability of google adwords but the
profitability of the media you're bidding for. When saturated you can always
expand your potential market (audience) by adding more keywords/placements.

------
cLeEOGPw
I wonder if click-per-view count is dropping too. Maybe people slowly learn
the patterns of ad placements and subconsciously ignore them, like I feel I
started to do back in the banner days before using AdBlock.

------
pmelendez
Well, the online display advertising market is getting harder for everybody,
so Google is not having that easier either.

As RTB market (<http://en.wikipedia.org/wiki/Real-time_bidding>) is growing in
significance, then it is starting to make sense to diversify the networks that
advertisers would use, so just using Adwords is not enough anymore, and in
that sense it is time to start checking out OpenX, Appnexus, etc.

------
Imagenuity
You can't just display an ad at any price, even if there are no other ads.
There are too many spam ads now, but it used to be quite a bit worse. Setting
a minimum price sets the bar high enough to make it not worth the cost to
spam. It's gotta be a juggling act for Google to keep prices within reach of
legitimate advertisers while keeping out the riffraff.

The only other solution is to manually approve all ads before they go live.

~~~
davidsturnbull
Hang on a minute. What's the difference between spam and an ad, anyway? It's
all spam, surely.

------
kenster07
Part of this can be explained by the nature of auction-based systems: the more
participants there are in an auction, the higher the average price will be at
the end of that auction for any given item.

As far as CTR, that could be explained by way too many factors.

------
ntumlin
This is unrelated to the article, but is anyone else experiencing not being
able to scroll with a mouse scroll wheel on this page? I'm using Chrome on Win
7 64 bit and the scroll wheel does nothing, though it still works on other
pages.

------
jameszol
For every one of these "declining profitability" stories, there is an equal
and opposite story. It's a cyclical story, too.

Either way, Google wins.

------
pknight
What are the best alternatives to Google Adwords in terms of paid advertising?

~~~
jyothi
there is no best alternative as Google owns more than 80% of overall market.
If you want scale you cannot ignore Google - hence the monopoly and inflation
of bid rates.

the next best alternative which can bring 1/4th of google adwords traffic are
bing adcenter, retargeting companies like adroll, vizury. Facebook & Linked
Ads work for specific domains.

------
senthilnayagam
we are seeing similar trend, looking for a alternative which works and is cost
effective

~~~
gesman
Find which sites your buyers are visiting and advertise there directly without
Google. your customers are using google.com for a few seconds a day, but
reading relevant sites for hours.

1\. Search for your keywords.

2\. Click on top 20 sites within organic (not paid) results

3\. Strike a deal with these sites to advertise.

------
mmmooo
Ozzie c

