Stock and Search Markets: The Similarities

All this talk about Google’s IPO got me thinking about auctions and marketplaces. The more you think about the stock and commodities markets compared with auctions for search engine position, the more similarities you see.

Any stock has a limited number of shares. In commodities markets, there’s a fixed quantity of pork bellies or frozen orange juice concentrate. Buyers of stocks or commodities use internal and external information, formulas, and gut instinct to bid in the marketplace (some even try to use insider information). The reason buyers bid high is they believe the stock’s or asset’s true value is greater than the marketplace asking price. In the stock market, investors use various formulas to determine value. Some use NPV, others are value, trend, or chartist investors.

When you bid on keywords in the search marketplaces of Google, Overture, FindWhat.com, Kanoodle, and the rest, you use a rational (or possibly irrational) basis on which to make decisions. Traffic generated by each keyword or keyword phase is a potential asset to the marketer — at the right price. Even the visibility of each listing may have measurable branding value.

In the stock market, scarcity of a company’s publicly traded stock results in its price “clearing” at a point at which the buyers’ and sellers’ perception of value are nearly identical (or separated by a small bid-ask spread). A seller is convinced long or even short term, the share’s price will go down (or not grow enough to meet the investor’s goals). If the buyer wants more shares than sellers are willing to sell at a given price, the buyer must increase his bid to encourage additional sellers to enter the market.

In search engine marketing (SEM), it initially appears the engines (Google, Overture, et al.) are sellers. You vie with competitors on a keyword-by-keyword basis. There are keyword position marketplaces in which you buy a higher position from the competition. While the search engines collect CPC fees, you buy traffic and orders away from competitors.

Competitors want their current positions, but you determined you want some positions (and their associated traffic) more than competitors do. So, you buy the position out from under them.

Each search result’s position is like a stock. Each has its value (to each marketer) and clearing price. So when the Google or Overture rep gets you to raise your spending from $12,000 to $15,000 per month, the extra traffic you get is taken from a competitor. Similarly, when your listings are pushed down, it’s not the search engine’s doing. It’s a competitor who decided the traffic and visibility associated with your keyword is worth more to them. This has the makings of a bid war, but only up to the values marketers place on each position and keyword.

Although we know better (notwithstanding some lunatics out there), let’s hope these bidding decisions are made — whether manually or by campaign management software — based on rational business models. Those models might be simple return on investment (ROI) formulas or highly sophisticated valuation formulas that take immediate profit, multiple conversions, cross selling, and lifetime value into account.

Sometimes, a bid will look like a ludicrous decision when, in fact, a brilliant marketer, working with a sophisticated software platform, made very rational choices. The same situation occurs in the stock market when we see price movements. Without knowing the other investor’s data and formulas, we make our own decisions, based on our own data.

Some of the strategies, concepts, and rules you would set for yourself when trading stocks should also hold true for buying search engine traffic, with one big difference. You have it within your power to create a reasonable estimate of each keyword listing’s true value to you. This affords you a killer advantage, but only if you:

• Know the market and learn from the experts.
• Have a good idea of your short- and long-term objectives.
• Know what drives your business’ profitability.
• Do research into the post-click behavior of each keyword listing.
• Understand past data doesn’t guarantee future results.
• Know the pricing volatility of the keywords in your portfolio.
• Calculate the maximum price you can pay and still boost profits.
• Understand the tradeoff between click price and sales or lead volume (market elasticity).

Applying quantitative and strategic processes and rapid decision automation to the search engine marketplace can be extremely profitable. But know what you’re doing. Like the stock market, play it wrong and you can lose your shirt.

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