Sealed Vs. Open Keyword Auction
If you have ever seen a mortgage lead form, you will know that one of the drop downs deals with the potential borrower’s credit. Not being a mortgage banker or broker, it would seem reasonable to believe that those on the lending side would only want to deal with people who had good credit. – they will not have a problem getting the loan and will borrow more money. Both are true, but the average borrower with good credit also tends to shop around more. They have a greater understanding of their own value and of what their loan should look like. As a result, while often-good clients, they aren’t highly profitable ones. Borrowers with poor credit on the other hand, do not shop around as much and are more likely to take whatever deal they are given, and lenders have certainly taken advantage of this fact. When abused, this practice is known as predatory; on the whole, it’s only slightly deceptive. Whether good or bad, the truth is that companies do this all the time. One company that you might not expect to benefit from this, or facilitate it, is Google.
Most buyers and sellers have a familiarity with paid search. It involves the selection of keywords and entering a price for those keywords. Think of it like eBay. Each keyword is an item, and the process for having your ad associated with that keyword involves a dynamic auction. Unlike eBay where auctions involve only one item and thus one winner, in paid search, each keyword can have up to 40 advertisers associated with it. Those who bid more get listed higher, and the higher the position, the more traffic one receives. Yahoo’s Overture division popularized this process. Like eBay, they let advertisers bid for position and each bidder knew what the bidder in front of them and behind them paid. Pay more and you can get listed higher. As it’s an auction, once you raise your bid, the other person might too. You can’t know for sure what their limit is, but you will always know the price it takes to move up or down.
For those who have not spent or made money with Google, their system works differently. They too allow advertisers to bid on keywords, and placement involves a dynamic auction. The biggest difference though is that Google includes a performance criterion along with price when determining the ranking of the advertisers. The advertiser in the top position might pay more per click than the advertiser in the second position, but there is no guarantee. Paying more often helps to get listed higher, but just how much more is undeterminable. And, unlike Yahoo, Google does not disclose the price per click of the advertiser.
Google’s methodology for bidding is known as a sealed auction. Everyone bids, but what the winning bid is, is unknown. Yahoo on the other hand, by disclosing the bid prices, runs the opposite, an open auction. While simplistic, given the experience level of most readers, this context on search – from the basic description of pay per click and the various auction methods employed by the engines – explains the secret to Google’s profit. By not knowing what others bid, advertisers have no choice but to experiment. They bid on more words and at different price levels in hopes of getting the position they want. Experimentation is inefficient and as a result highly profitable. But, what about the publishers? How does this impact them? By not revealing their bid amounts, publishers running Google ads on their site have no real way of determining what revenue share they receive. And, even if on a fixed revenue share, they still have no way to gain insight into the performance of the keywords that made them their revenue.
Google’s sealed auction method, one that combines price with performance data but shares neither has real benefits. It does promote better ads, a more active marketplace, and it gives the company the flexibility to display the ads across various types of content. They can adjust the prices charged to the advertiser based on their assessment of the traffic quality, and it also means they can pay publishers varying amounts for the same ads based on Google’s perception of the site’s quality. The downside though, and why Google isn’t all that different from consumer financial service companies that work with poor credit borrowers is that they don’t help anyone save money, or pass the extra money they receive directly on to the publishers.
The new Microsoft continues to roll out, as the market demands, making sure not to increase their closed wall nature. This past week, for example, Google announced free analytics for advertisers, the ability for advertisers to bid directly for placement on a particular site while visiting that site, and separate pricing for content. But, don’t be fooled. Google does what is good for Google. They will not make it any easier or cheaper for the marketers or any more profitable for the publishers than it has to be. Do no evil – perhaps to the end user, but for advertisers and publishers, it’s more like “No mercy.”
