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CPM Auctions and Google's CPA Network

  |  July 11, 2008   |  Comments

Why don't search engines run their paid placement auctions as CPM auctions? And why is Google's AdWords CPA being phased out?

At least a few times a year, Wall Street analysts ask me why the search engines, Google in particular, don't run their paid placement auctions as CPM (define) auctions. This method would maximize revenue and allow for a far simpler formula, and transparency could return to what is increasingly becoming an opaque keyword-driven paid-placement auction.

The answer, of course, is relevance. Without a normalized CTR (define) to gauge relevance among different creatives, the destination domain, and the search query, a scenario could easily evolve in which a luxury car manufacturer bids a high CPM for golf keywords, knowing the golf searcher profile fits its marketing needs, while a minivan brand buys keyword phrases such as "baby boy names," knowing that many people deciding what to name a child may be in-market for a minivan soon.

Such a system would be great for marketers, but bad for consumers. So instead of bidding on CPMs, we bid on CPCs (define), which are converted by the search engines (using normalized CTRs) to a predicted effective CPM. On top of that, at least in Google, a black box algorithm tries to determine if the landing page or site is relevant, no doubt including spider data with click-back data -- gathered by watching which searchers return to the SERP (define) in a short time, their information needs unfulfilled.

The search engines fiercely guard the SERP's relevance, both organically and within the paid listings. But marketers and advertisers just want control and predictability. These clashing objectives can cause problems for both sides, but advertisers must shoulder a large part of the burden because the engines are so focused on relevance.

Many marketers would love the transparency of a CPM auction for paid search position instead of the algorithmic black box, which gets more opaque all the time as the engines add new variables. Instead, we find ourselves reverse-engineering the algorithms and using the information and control we have to control campaigns dynamically, often through APIs (define).

On the other hand, non-search keyword-targeted inventory may lend itself more to direct CPM auctions, particularly if the ad unit is anything other than the standard 25 to 70 character text link. This is true whether that ad is targeted contextually or behaviorally because there's no expectation among consumers for a particular level of relevance in non-search environments. The next year promises to bring some interesting enhancements within the CPM-based display ad marketplaces as they're integrated into existing search and keyword-targeting platforms.

Another question I get about the evolution of search advertising is whether CPA (define) marketplaces will replace CPC (including its coveted relevance). CPA advertising will remain, at best, a secondary backfill to CPC-based advertising for the foreseeable future due to a variety of factors, including the inability to track and reconcile missing cookies, latent orders, cross-computer sales, and offline conversions.

Additionally, in the auction environment (because of uncertainty and many marketers are bidding higher to take the factors mentioned earlier into account), smart ad servers will normally favor the CPC ad over the CPA ad. Finally, search's branding value is also largely ignored with a pay-per-action monetization and billing model.

AdWords CPA Being Phased Out

And speaking of CPA ads, Google will phase out the AdWords pay-per-action beta at the end of August. This was more of an AdSense program (I don't recall seeing any traffic from SERPs), but nonetheless, with the acquisition of Performics and the pledge to shed the search division of Performics, Google can focus its pay-per-action activities within the ConnectCommerce Performics network. However, it's interesting that the two networks are completely separate.

Right now, an AdSense publisher must apply separately to ConnectCommerce, and no specific plans have been announced to allow Performics publishers to automatically gain access to CPC-based ad inventory within AdSense. Perhaps those of you who use Performics as an affiliate network have seen inbound clicks coming from Google's less monetizable properties, such as YouTube. If so, drop me a line.

In closing, it's worth mentioning that Google recently upgraded its Keyword Tool. Google indicated that it "added search volume data to the Keyword Tool. Now, when you use the Keyword Tool to search for relevant keywords to include in your keyword list, you'll be able to see the approximate number of search queries matching your keywords that were performed on Google and the search network."

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Kevin Lee

Kevin Lee, Didit cofounder and executive chairman, has been an acknowledged search engine marketing expert since 1995. His years of SEM expertise provide the foundation for Didit's proprietary Maestro search campaign technology. The company's unparalleled results, custom strategies, and client growth have earned it recognition not only among marketers but also as part of the 2007 Inc 500 (No. 137) as well as three-time Deloitte's Fast 500 placement. Kevin's latest book, "Search Engine Advertising" has been widely praised.

Industry leadership includes being a founding board member of SEMPO and its first elected chairman. "The Wall St. Journal," "BusinessWeek," "The New York Times," Bloomberg, CNET, "USA Today," "San Jose Mercury News," and other press quote Kevin regularly. Kevin lectures at leading industry conferences, plus New York, Columbia, Fordham, and Pace universities. Kevin earned his MBA from the Yale School of Management in 1992 and lives in Manhattan with his wife, a New York psychologist and children.

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