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Gauging The Size of the Google Economy

By - December 16, 2005

CashA Fortune Small Biz reporter, Justin Martin, called today and among other questions asked one that I did not have a ready answer for. But it seemed like a very good question, and it’d be neat to have an answer. In short, he asked, how big is the Google economy? We bounced it back and forth, and what he meant by that phrase is the aggregate amount of direct economic impact Google has on businesses large and small. Not an easy thing to nail down, but often you can create useful proxies if it’s Friday and you’re trying to avoid real work.

I was thinking that you might take Google’s gross revenue number, which is projected to be more than $6 billion this year, and then the estimated number of AdWords customers, which I realize I don’t have a reliable number for. The last time I wrangled something out of Google was two years ago, when it was about to cross 200,000. So, assuming decent growth (say 25% a year), we’re now at what, nearly 300K (OK, 281K, but for all intents and purposes…).

OK, stay with me. I’m not a quant, which is why I’m doing this in public. I know there are quants out there reading, and there are folks with access to better base case numbers, not to mention better ideas about how to do this.

In any case, if you do the division, you have $6 billion / 300K which equals roughly a $2000 spend per AdWords advertiser, if I’ve kept all my zeroes in place.

OK, so what were the *results* those business got based on that $2000 annual spend?

*That’s* a key stat I wish I knew. The average return on an AdWords investment. Anyone care to speculate?

Sure, OK, I will. Let’s assume that for every dollar they put in, they got more than one dollar back in sales. Say it’s a 10% bump. So that would mean for the $6 billion they gave Google, $600 million in increased sales was created in their businesses. Or, put another way, every AdWords advertiser drove $200 in marginal revenue from their investment in Google.

If that figure is negative, well, Mountain View, we have a problem. If it was 150%, why, I’d like to know that too. Any of you SEO/SEMs out there with a large client base care to give us a clue?

Of course, the other way to measure the Google economy is to simply look at a stock chart….

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  • http://joeduck.blogspot.com Joe Hunkins

    Based on my own modest spending with Adwords and talks with SEOs I think 5-10% is probably a reasonable estimate for adwords. But wouldn’t the Google economy also include a percentage of the action on all those SEO and SEM firms (most of which are focusing on Google) plus sales resulting from ranking well in the Organic listings. I think this could be (10x?) the paid listing economy.

  • http://prestonwily.com Preston Wily

    Maybe I’m in a unique industry but I would say that 5-10% is quite low. I’m sure that eventually PPC’s will be bid up to a point where this will be true but I haven’t ran across an industry yet where this is the case.

    I would agree with your comment more if:

    $600 million in increased sales was created in their businesses

    were changed to:

    $600 million in increased profits was created in their businesses

    which would mean a huge increase in sales and, hence, economic influence for google.

    Just my thoughts…

  • http://joeduck.blogspot.com Joe Hunkins

    Preston I really challenge you on this – please elaborate. If a biz initially gets, say, a 30% return on the budget they will tend to increase their spend and go for terms that give them any positive returns. This process should trend toward lower returns, esp. for big spenders.

    Also MANY experiments with PPC yield negative ROI, far more than is commonly thought. In travel sector I’m convinced most big players lose money to gain market share of traffic and preserve the company valuations.

  • http://www.rathernotsay.com Brian

    Your numbers seem to me to be a bit off. I think you’re thinking in ebay terms… people who use google to sell things and rake in an additional 10-20k a year in advertising. I’ll conceed… these sorts of google people might be more sizeable than me. But for 5 years now, I’ve run an online services company (sorry, but I have to be vague… but it’s not IT services and it’s not porn). We advertise almost exclusively on Google… and gross 750k+ a year. I spend between 100-150k a year at google. Crunch those numbers. I can tell you, my business simply could not exist without the scallable advertising google allows me to run. How many other sub-million-dollars-a-year companies are the out there who, like me, could not exist without pay per click advertising?

  • John

    IMO, eBay has a better case for having a claim to this sort of outsized economic impact. They created a market where one did not already exist.

    In Google’s case the market already existed. Merchants were doing business online for years before PageRank. I think that rather than creating a market, Google should be recognized for adding a great deal of efficiency to an existing system.

    There is probably an interesting story here but I’m not convinced that GYM hasn’t taken more out of the system than it has put in…

  • New York

    I would look at the impact from the perspective of “sales” that Google drives for its advertisers (somewhat like a GDP-type figure). Assume a general marketing cost based on effective revenue share in the retail sector of 25% – so in order to generate $100 in sales from Adwords, a retailer would need to pay Google $25 (25% effective revenue share). Then assume that Google’s effective revenue share skews higher across non-retail sectors (e.g. Financial Services) bringing the total net effective revenue share to 40%. To determine economic impact, gross-up (divide) Google’s revenue of $6BN by 40%. That yields an economic impact of ~ $15BN from the perspective of sales generated by Adwords. Thats the general approach I would take (there are obviously many additional components).

  • http://www.rathernotsay.com Brian

    John…

    I have to comment on your comment immediately, because you’re exactly missing the point of what I was trying to explain above. If I had started my company in 97-98, before pay per click took off, I would not have made it. Believe me, in the early days I wasted tens of thousands of dollars on banner ads. The OLD internet advertising model was not only completely stupid, but it priced out the little guys. Banner ads were and are designed for Toyota or Coke to build brand. To actually SELL THINGS… pay per click had to be invented.

    By the way, not only could my business not exist without pay per clicks like google, not only could it not compete in a big-fish-world like banner ads, but I have NEVER EVER spent money on offline advertising.

    What about that market? How many companies out there couldn’t exist in the real world… could only have come about with the internet… and THEN could only become profitable once google and goto (overture) (yahoo paid whatever) made it feasible for us to advertise effectively?

    There’s a huge untold story in this… a huge economy that no one has written about yet… AND THAT is the reason google is so profitable.

  • John

    Brian,

    Yours is one of many great examples showing the economic efficiency Google creates.

    On the other hand, my experience tells me that there are also examples that would indicate GYM to be closer to a form of Tax on the Internet than a force for Economic efficiency.

    There are most definately two-sides to this issue.

  • Brad

    I think New York’s approach is the correct one, although I don’t know about the estimates for average marketing spend as a % of revenue. I also agree that this whole number, say $15-20b in sales being generated from Google ad words, is not incremental to the economy, perhaps none of it is. For instance, whatever services Brian (see above) provides presumably they were being provided by someone else before, and if not then the people buying his services were spending their money elsewhere before. But to the reporters answer I think you need to find the average marketing spend and then divide your estimate for Google’s gross revenue by it.

  • http://randomdude.com/blog/ Dustin Quasar Sacks

    When considering the entire google economy you must take into account both paid and natural results. When you combine those 2 then for me, google is responsible for bringing me almost 70% of my sales. Google basically enables my business. If you extrapolate that across all the companies in the same position you will come to a huge amount of money. I would say significant % of online business is part of the google economy.

  • http://www.gsoftmedia.com Gopi

    Spot on Dustin…I would say the economic impact of Google’s natural results would be atleast 10 times than that of its paid results (assuming an average CTR of 2% and 20% for paid and natural results respectively)

  • http://prestonwily.com Preston Wily

    Joe,

    I think we agree with each other – you are alluding that a company will have a 30% return on adspend which, I am guessing, you are implying is profit. At that point they will continue bidding their terms up until the percentage is more in line with a traditional marketing approach.

    Let’s go out on a limb and say that the average internet retailer nets 10% (I’m sure that we agree that many retailers do much better than this and many do much worse) then a 30% ROI on an investment dollar would be $3 in sales for every $1 in adspend. Accordingly Google’s economic impact would be 3X’s total adspend, or $6B. While adspend will continue to rise, returns will rise also but not proportionally. Eventually internet advertising will look a whole lot like traditional advertising.

    Preston

  • http://www.netconcepts.com Brian Klais

    Most brand name retailers are looking for a minimum payback on ad spend of 5:1 (others as much as 20:1).

    So if the average small business spends $2000 / year with Goog, and earns back $10,000 in revenue x 300,000 advertisers, then the Googleconomy = ~ $30B per year.

    BK

  • Mark

    $6 billion divided by 300,000 customers comes out to $20,000, not $2,000. (To BK’s point).