Solving the Mystery of Google’s Q4 CPC Drop

As online marketers and search engine marketers, not all of us follow Google stock (GOOG). However, if you do follow Google’s stock price and earnings reports you would have seen a significant buzz around the drop in average CPC in Q4 2011 for Google. You may or may not have seen a similar drop in your own CPCs in your AdWords account. Either way, it is important for you as a search marketer to understand what happened at Google beyond even what Larry said on the earnings call.

Susan D. Wojcicki (senior vice president of ads at Google) discussed the CPC drop:

“When we make ad quality or format changes, CPC and paid clicks may be impacted differently. For example, when we introduced site links, we saw an increase in clicks. But the additional clicks were on lower CPC ads, which reduced the average CPC. Many of the ad quality changes in Q3 increased paid clicks at lower CPCs, and they were revenue-positive with good user and good advertiser metrics. These ad quality changes from Q3 had a cumulative effect on Q4 metrics.”

Both Wall Street and marketers have gotten used to CPC inflation, and for many of you, you may still have seen CPC inflation over the last year and during the fourth quarter. Before I get into the mechanics of the ad formats and their impact on CPCs and CTRs, let’s not forget the huge growth in mobile (tablets and smartphones) over the last year. Most data I’ve looked at shows that approximately 15 percent of search volume comes from mobile devices. Depending on the business segment or industry category, the percentage of paid clicks could index high or low against that number. Either way, mobile CPCs, particularly smartphone CPCs are nearly always cheaper than desktop/laptop clicks (unless the local behavior is very heavily desired by the advertiser in comparison to desktop users).

Clearly when you add a ton of less expensive incremental search click volume to the overall Google search volume, the less expensive clicks bring the average CPC down. That happened with the mobile search traffic.

The mechanics of the ad format CPC impacts are a bit more nuanced, but the same mathematical process drives the CPCs down. Less expensive than average incremental clicks on desktop and laptop search ads over-and-above the clicks that would have normally been delivered from the same SERP. However, this was a very good thing for Google because the new ad formats and the improvements in ad targeting drove a far greater increase in CPCs (across the entire SERP) than any reduction in CPC. So, overall yield went up. Let’s dig into the specifics.

PPC Sitelinks, Higher Penetration

Since PPC sitelinks were originally released (only on brand keywords), they have been expanded and made available to advertisers who have a high quality score and a high position (above the organic results). As one might expect, a lot of retailers structured their campaigns in such a way to make sitelinks relevant for all sorts of high volume generic searches. In particular, searches that were not product specific yet could benefit from some sitelinks messaging perhaps around promotions, best sellers, or categories. So, many more advertisers had PPC sitelinks enabled in 2011 than in prior years and those advertisers also had significant budgets and the quality score to allow for the sitelinks to be shown. The CTR on a sitelinks ad can be 30 percent higher or could be as much as double the regular ad. More clicks. Hooray for Google even if the high quality score ads triggering the sitelinks have CPCs below average. As long as the CTR goes up, the yield goes up.

PPC Sitelinks, Higher Query Percentages

Not only were there more advertisers in Q4 with sitelinks, the mix of searches during the holiday period favored the kinds of ads that are more likely to have sitelinks. Therefore, sitelinks were more likely than ever before to show up in the SERP.

PPC Sitelinks, Quality Score Increases

Even though Google may normalize for this effect somewhat, the reality is that the highly relevant sitelinks ad unit will get a much higher CTR and therefore a higher quality score than a traditional ad. That may mean the advertiser can afford the top position at a slightly lower bid. Google still makes much more on the advertiser because the CTR increase was much higher than any quality score-related discount. Yet, as one would expect, all these less expensive clicks entering the mix lowered average CPCs.

Other (Ad Enhancements)

The same impact to CPCs and CTRs was generated by deeper roll-outs of other ad extensions as well. Location and product extensions in particular raise click-through rates (CTRs) on ads and may therefore also improve quality score slightly at the same time.

Over time, the auction pressure within the overall AdWords ecosystem will likely bring back CPC inflation. After all, the best and biggest advertisers are constantly improving back-end conversion and profit metrics (average shopping cart size, etc.), and those improvements raise the reserve price on keyword bids. An intelligent bidding and campaign management system managed by a professional team will test the elasticity of the ecosystem and raise bids when those increased bids make sense at the marginal profit or marginal revenue level.

Clearly the sky is not falling within paid search. Google just decided that a yield increase that also comes with a slightly temporary discount on clicks for some advertisers was a good tradeoff.