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Weekly Column

Google Goes Las Vegas: An AdWords Experiment Shows Why at Google, the House Always Wins

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

Google is in the news everywhere lately. They are filching executives from Microsoft, and Microsoft is conveniently forgetting how Redmond did the same and worse to Borland. Google is scanning the world's books, and the world's authors aren't all pleased about that. But this column is about something both far more prosaic and important -- the very nature of Google AdWords, the search giant's paid placement advertising program that is, by far, its greatest source of revenue. But as you are about to read, AdWords is probably much more complex than we are led to believe by Google.

AdWords was Google's response to the paid search placement program from Overture Systems, now part of Yahoo. Overture allowed web sites to pay for higher placement in searches that used certain words. Someone could pay a lot of money for the word "Cringely," for example, and have their totally non-Cringely web site appear above this one in Overture's search results. This really wasn't as bad as is seems as long as advertisers paid for words that really described their sites and most words weren't purchased.

Google's AdWords took the process a couple steps further. First, it segregated paid and unpaid search results by placing the paid results in a separate location where those results were identified as advertisements. But Google also embraced fully the concept of an ad and allowed the payers to make their own two-line pitch. Overall, the AdWord system was more honest and up-front with users about what was happening. And honesty has worked well for Google, with AdWords becoming a goldmine for the company.

But AdWords isn't as simple as it seems at first. With Google, things rarely are. As usual for Google, there be algorithms at work here, and the nature of those algorithms is alluded to, but never fully explained. What Google does admit is there are forces that can drive an advertiser's listing up or down, making them appear on the first page of results or push them down to second and subsequent pages. Both effects, it is strongly implied, are in the control of the advertiser. Advertisers can move higher in AdWord ranking by paying more money for the key words they have chosen. But they can also move higher -- or lower -- based on the quality and desirability of the ad, itself.

This second effect deserves its own paragraph. As a Google advertiser you can decide to pay some amount -- say $0.20 -- to have your ad appear whenever someone's Google search includes the word "Cringely." To be honest, I just checked, and while there are 1,030,000 Google results for "Cringely," there are no ads at all on the results page, indicating -- as many have long suspected -- that I have no commercial value whatsoever. But for searches that involve very common words like "mountain bike," or "libido enhancement," for example, there are multiple pages of ads, and what puts your ad on the front page is not just how much money you are paying, but also how frequently Google searchers actually click on your ad.

This makes a lot of sense because Google wants to feature ads that its users find interesting enough to click on, both because it indicates they are more intrigued than annoyed by the ad and because Google makes money from the clicks-through. So without having to actually read the ads individually, Google has found a revenue-generating way of measuring their usefulness to readers by monitoring click-throughs.

The upshot of all this is that clever ads and offering legitimate good deals can improve your ad positioning ,which will inevitably improve your sales in a virtuous cycle that fits well with Google's corporate model of not doing evil. The users', advertisers', and Google's results are all optimized in this way, which discourages bad or poorly-targeted ads. If your ad is so clueless or useless that hardly anyone clicks, Google will eventually reject the ad altogether.

That's what we know about the AdWords algorithm without being actually able to SEE the algorithm, which is of course a trade secret. But does the algorithm do anything else?

One of my readers makes his living selling goods over the Internet, and his sole means of obtaining customers is through Google AdWords. His business is robust for a one-man operation and he makes a good living. Knowing the actual numbers, I would say he makes a VERY good living, which shows the effectiveness of Google and AdWords as an advertising medium.

But one can never make enough money, it seems, so this reader decided to do some research to see if he could improve his results by modifying this and that. He decided that the best way to conduct this research was not by altering variables on his existing, very profitable web site, but by creating a separate site purely to be used for these tests.

Clearly, this is a behavior that the big brains of Google did not expect.

It was no big deal to create a separate experimental site. Web hosting companies offer e-commerce sites for only a few dollars per month. A Google AdWords account costs only $5.00 to set up. The actual content of the new web site could simply be copied over from the pre-existing site and changed at will as dictated by the experiment.

Most people would alter variables on the main site and see what happens, but this guy didn't want to mess with the success he was already achieving, so he came up with this parallel experimental design.

The first thing he wanted to study was the impact of paying more or less for AdWords. He knew that paying more would result in higher placement -- especially given that both the ads and the AdWords would be identical between the two sites. What he didn't know, however, was whether a slight increase in cost-per-word would more than pay for itself in increased sales, or whether a slight decrease would go effectively unnoticed, thereby increasing his profit margins.

His old site with the same ads had been running successfully for a year paying at the relatively low rate of $0.10 per word (the AdWords minimum is $0.05 per word) and generating about 15,000 clicks-through per day. But for the new site, he started out paying $1.00 per word for exactly the same words. Based on everything he had read about AdWords (remember nobody actually SPEAKS to Google about these things -- the service is totally automated from Google's end), he expected his ad to move higher in the rankings and, hopefully, to make more sales as a result. And that's exactly what happened, though not to the extent that he would have liked.

Buying AdWords at $1.00 versus $0.10, his ads DID move higher on the page and his revenue was increased, though not by enough to justify going all the way to $1.00 with its associated higher cost basis.

All the while, of course, the essentially identical original web site was churning along, still entirely dependent on AdWords, still carrying identical ads for identical products as the test site, and still generating an average of 15,000 click-throughs per day.

Now it was time to drop the per-word price a bit on the test site to see whether he could increase his profit margins after paying too much at $1.00. So he set the new per-word price at $0.40 -- still four times as much as he was paying per word through his main site.

And his clicks-through dropped from 15,000+ to 1,200 per day.

Huh?

Same products, same ads, same service, but by paying four times MORE than his main site his results dropped by an order of magnitude.

A bit more experimenting showed a similar effect and he was never again able to match the success of his original site as it continually operated in precisely the same market with precisely the same services over the exact same period of time.

I have no idea what the heck is happening here, but my friendly reader, who makes his living from this stuff, has a theory. He believes the Google AdWords algorithm tries to do many things and one of those is to encourage advertisers to pay more for words. By modifying something that in turn modifies the results, Google is effectively encouraging advertisers to change their behavior.

So increasing the amount per word DID increase sales, though not enough to justify the additional cost. Google's revenue per word, of course, went up by 10X. But dropping the price by more than half was greeted by a huge decrease in clicks-through that could only have resulted from some unknown resultant change in GOOGLE's behavior, given that all other variables were constant.

If that's indeed what's happening, it isn't illegal and to some might not even be unethical (I guess) but it feels just a little bit EVIL.

Ironically the only way this could be observed was though the use of parallel, otherwise identical web sites and AdWords accounts.

"It's like Vegas," said my friend. "They want you to lose. Try to game the system and they cut off one of your legs."

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