Google and Overture: CPM in Disguise?

Search engine marketers have come to rely on Overture and Google, due to their extensive reach and their CPC pricing model, but we need to be aware that — just like any other media — Overture and Google are constantly striking a balance between making marketers happy and maximizing revenue for themselves and their syndication partners. After all, they are in business to make some dough, as well as to serve marketers. This revenue imperative may mean marketers have to work harder to get the results we want from paid listings. Both very different systems are moving evermore toward a CPM model, even if the bill you pay is CPC.

Google’s AdWords Select allows marketers to specify a CPC maximum and an ad (title, description, and URL) for rotation among the Google paid results and those of Google’s partners, including AOL, EarthLink, and AskJeeves. Here’s the method of maximizing revenue: Unlike Overture and, the Google AdWords system displays ads in the order of the effective CPM of the ad rather than that of the maximum specified CPCs. This means the ads with the highest effective CPM are placed in heaviest rotation, maximizing revenue. For example, an ad with a 4 percent CTR and a $0.25 CPC ($10 CPM) will rotate into higher positions than an ad with a $0.35 CPC and a 2 percent CTR ($7 CPM). The higher CPC does not get better placement. Google’s CPM-based system may have been a factor in the recent AOL and AskJeeves deals.

To succeed with Google, marketers must run their campaigns using CPM-like strategies, with copy and keywords selected for high relevance and click-through. If a marketer selects poor keywords or attempts to prequalify a searcher in Google, the ad will fall out of rotation and possibly be deactivated altogether due to poor CTR. Ads that get higher CTRs — and also have higher bids — will get great position and rotation.

On Overture, the higher maximum CPC bid gets the higher position regardless of what CTR the ad receives. However, Overture also must maximize revenue and is adopting marketplace changes that drive up effective CPM across its network. For example, within the last year or more, Overture advertisers have noticed an ever-increasing stringency in editorial approval of search listings (Overture editors approve every ad that is placed in the search results). Although the stated purpose of the recent editorial changes is to improve the quality of search results for the searcher, an equally important benefit to Overture is an increase in revenue efficiency. Relevant ads tend to get an increased CTR, making both Overture and network partners more revenue on a limited but valuable search inventory.

Smart Overture advertisers use the CPC pricing model of Overture’s auction system to their advantage, by writing copy for ads that will prequalify clickers, eliminating those who may not be a good fit. For example, a recent search for “lawyers” on Overture showed several listings that include geography in the title; the advertiser is hoping to get a click-through only in areas it serves. Similar prequalification techniques include the use of price, brand, age, gender, or another attribute to get more of the “right searchers” to click on listings. Of course, prequalification techniques make an ad less revenue efficient for Overture and its portal partners. Overture, Yahoo, MSN, and AltaVista incur a large opportunity cost when searchers skip ads, resulting in less revenue.

On June 26, 2002, Overture’s new bidding system was launched, allowing advertisers to elect to pay one cent more than the next lowest bidder would have been willing to pay (not what they actually pay). This is a change from a system in which advertisers paid their exact bids all the time, regardless of the next lowest bid. This encouraged many marketers to raise their top bids, placing the new higher max bids in the Overture DirecTraffic Center (DTC) system.

More recently, Overture implemented a “Click Index,” which is a measure of the CTR from impression to click. The click index data has been available to advertisers through the Overture DTC for some time. According to a recent Overture announcement, a listing that performs poorly (low click index) now may be deemed “low performing” and will be removed. Details on the implementation and impact of this “feature” were sketchy at press time, but this change gives Overture an amazing level of control over which listings it chooses to display in premium positions. Of course, this also moves the Overture marketplace closer to a CPM-based system. Advertisers suddenly need to worry more about compelling copy that keeps CTRs up.

To thrive in the new search engine marketing environment, where CPC is looking a lot like CPM advertising, marketers must do the following:

  • Select the right keywords and phrases to test and manage in a campaign.
  • Write ad copy that balances call to action with education/prequalification to keep click-throughs at reasonable levels. Test it!
  • Have landing pages (where the searcher lands after clicking) that convert those searchers to revenue effectively. Test variations and offers.
  • Manage the campaign in an automated manner, based on measured conversion. Use a specialized vendor or, if the campaign is small, manage it manually.
  • Use the measurement and metrics data for site-related decisions (e.g., pricing, call-to-action copy, product mix).

Overture and Google are making use of analytics, technology, and strategy to maximize their revenues. Advertisers can do that, too. By applying metrics in an automated and intelligent way, advertisers can manage campaigns strategically based on cost per action (CPA), cost per order (CPO), or return on investment (ROI), not based on emotion.

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