When Might the PPC Gap Close?

In conversation with folks equally besotted with all things search and marketing, the talk often turns to click fraud. After some mandatory clucking of tongues, I go off on my own little riff about the subject – how it's difficult to prove as a percentage of overall PPC revenue…

FtdIn conversation with folks equally besotted with all things search and marketing, the talk often turns to click fraud.

After some mandatory clucking of tongues, I go off on my own little riff about the subject – how it’s difficult to prove as a percentage of overall PPC revenue (beyond the anecdotal), and how – for the time being anyway – it really doesn’t seem to matter. Click fraud is something of an ecosystem “tax” – advertisers who are putting $1 into AdSense, for example, are (usually) getting more than $1 back. Whether they get $2.00 or $1.75 is not that important, if, say, 12.5% of the clicks are fraud, who cares? You can always petition Yahoo or Google for a refund (though not all do).

Only when they start getting back 99 cents (or less) for that $1.00 will the “margin pressure” build to “do something about click fraud” in any real sense. In the meantime, advertisers are happy with AdSense, because, well, it works well enough, and there’s no incentive to change it.

This post about a recent earnings release from FTD, written by Jeff Matthews, struck me as a potentially important insight with regard to all this. Matthews likes to stare at corporate behavior and find the stuff that perhaps others have not thought about. From what I can tell, he’s not a search fellow, but, a reader pointed me to his stuff, and it’s good.

From his post:

“During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume.”

That comment was contained in the long first paragraph of a press release from FTD Group, the flower delivery people, that was issued at 5:54 E.S.T. last Thursday night, when almost nobody was around to care.

Now, I don’t follow FTD closely, but its business model depends more than you might guess on internet searches—after all, somebody searching for “flowers” on Google is probably not doing deep scientific research into botany. They are very likely a guy, running late, kicking himself for putting it off until the last minute.

…What is also interesting about the FTD release is that the company states that despite a pull-back in online ad spend and the resulting revenue shortfall, the company will still hit its EBITDA and earnings targets…

…This suggests that at least in the floral delivery category of online search, and assuming FTD is not just blaming an innocent bystander like some companies we could imagine, the marginal cost of a new customer has reached parity with the marginal profit from that customer. Which is not something anybody expected happening any time soon.

So what is FTD doing about this turn of events?

“…we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio. We believe these initiatives will enable us to regain our competitive position in the marketplace and continue to deliver long term bottom line results for our shareholders.”

A possible conclusion? Search marketing may be on its way toward a slowdown, if not a plateau. And while this is entirely anecdotal, and certainly nothing to base decisions upon, it points to the margin pressure idea, and, I think, validates it. At least as far as FTD is concerned…

Thanks, Searchblog reader Philip!

16 thoughts on “When Might the PPC Gap Close?”

  1. Of course that’s what’s happening, John. I saw it coming 2 years ago. Any rational advertiser (e.g. the big, smart players in any given category) will not spend more than 100% of gross profit from a given transaction for very long (aka breakeven economics), before pulling back. But, lucky for GYM+aol, there are plenty of irrational folks who will gladly spend that and more in the quest for reach…until their funding dries up and they have to pull back. The only hope for GYM+aol if they want to maintain high rates is that a fresh crop of big spenders keeps on showing up, or others with different economics who can therefore afford to spend more (e.g. suppliers themselves can afford to pay more than third-party resellers).

    This ominous situation underscores how GYM+aol have no choice but to diversify their source of revenue away from paid search, and get ready to soak up some of the coming wave of brand spending online.

    – Stuart

  2. “During the Christmas season, certain online search engine costs increased significantly over the prior year,…


    Interestingly enough, one could also interpret that the reasons search engine costs increased – was not because of Click Fraud – but because many Advertisers were Bidding Higher to take advantage of the rush, and that many more were taking advantage of Search Engine Marketing as an option to the capriciousness of Search Engine Optimization – (here today – gone tommorrow)….???

    Also, it may be likely that some surfers were just deciding by the Promotions on the HomePage, then clicking other Advertisers to see which floral arrangements were the prettiest, then going back to compare again, and so on…

    One really interesting tidbit to share…

    While putting together some ADs for Google Adwords and Yahoo Search Marketing, someone came up with an idea …
    “since there will be a statistical percentage of click frauds, let’s put Phone Number right there on the AD”….
    … this was assumed to balance out the click fraud loses – by getting people who might just call to speak to a Human Being, rather than clicking on the actual Ad and then calling – because they preferred a real-live person…

    This worked for a while – and was verified by asking people if in fact they clicked on the AD – and also, analyzing the Stats Trackers for that Landing Page that was set up JUST FOR THAT AD….

    Lo and Behold, when trying to do that same thing a few months ago – again, on Yahoo Marketing – an Error Message Appeared indicating that Contact Information was NOT allowed on the Ad!!

    So not only are Search Engines not illustrating a real tenacious drive to eliminate Click Fraud – they are being Greedy and Selfish!

  3. I was shocked the other day when I was explaining click fraud to someone (the kind where competitors click on others ads so that they can get top spot for the rest of the day), and the response I got was : oh I know people at work who do that all the time. And then I saw in action not too long ago a company that was upset it lost top spot and immediately bid back for it. Something seems so wrong.

  4. You know, as someone who has made millions and spent millions on PPC i’ve yet to see actual kick fraud.

    What i’ve noticed is that 30% of users clicks are reported 2 or 3 times because of slow internet connections but that is ALL filtered out, although google does not filter if you bid on a CPM basis. You can also see this if you track clicks to adsense via javascript. This is more of a browser defect then “click fraud”.

    3 years ago, i was able to bid on the word chat, redirect it to a site like americansingles. Just bidding on that term would yield me $500/day off $100 spent. You could make 10’s of thousands a day without any effort at all, in the last 3 years though all these sectors have been flooded with other affiliat marketers & companies. Now you have to go for all these obscure terms to make a profit.

  5. Forgot to mention although i see no click fraud on google and some on yahoo. But there is something like 90% fraud on Miva and kanoodle and pretty much any 3rd tier engine. Most of their traffic is either spyware or 2nd and 3rd world traffic trying to be passed off as north american.

  6. I run a couple of online marketing businesses in the UK. Now we spend 4 digits daily combined on PPC across Google, Yahoo (Overture) and MIVA (US and UK).

    Two years ago we achieved a 150% return on our PPC efforts. Now this is down to around 30%.

    The biggest factor behind this is that the PPC market is being used by a far greater percentage of businesses and is consuming a greater share of their advertising budgets.
    Secondly the market is becoming more ‘perfect’ in that people are hopping across PPC services and spending their money in a judicious fashion governed by economic returns.

    The third factor is click fraud. For us the worst, by far, is MIVA. We get hit frequently on certain keywords which might normally get say 20 or so clicks a day, rising to 300 when attacked. Used to be we could get some money back as we could demonstrate the same IP addresses (or family of IP addresses were used). Now the perpetrators are clever enough to use multiple IPs from multiple machines, possibly using ‘click-farms’ – but even though all the clicks come in a short (say 15 minute) period, it is not enough evidence to support a refund. Why should the onus be on the advertiser to prove click-fraud?

    Google comes in second in the click-fraud stakes, followed by Yahoo. We reckon at least 10% of our google adwords clicks are fraudulent. That’s conservative. But the time and effort involved in pulling out data from our log files to get a rebate is barely worth it. We have had a few rebates from Google, but they never seem to look further into a complaint to see whether the problem may have gone back beyond the period covered by the log evidence. Nor whether it occurred across other campaigns.
    Funny, that.

  7. I dunno, that conclusion about FTD seems suspect to me. You don’t deal with FTD directly, you actually deal with a florist who is part of the FTD network. So while FTD itself didn’t increase its advertising, you can bet that the individual florists who are part of the FTD network did. That would still show up as increased earnings for FTD.

  8. FTD just wasn’t watching the ball. They’ve had great organic listing for years and they most likely have had a reasonable PPC budget. But they didn’t pay attention as the market got tighter. They have as much admitted it by saying they are adding staff. Yes, there are more player bidding, especially in the 4th quarter, and click fraud is a major problem but ROI is very much positive in the world of search marketing.

  9. I would be very hesitant to call one advertiser’s decision to cap its spending in one quarter an indicator of slowdown in keyword advertising.

    As a previous commenter points out, one would expect PPC’s to go up as keyword demand increases, independently of any fraud or gaming the system. The asymptote it should theoretically approach, however, is not relative to the profit of the immediate order, but rather to the net present value of a new customer. Fully loading that NPV number would include such factors as the value of growing market share relative to a competitor, the optimism of marketers with respect to conversion rates, the value of information learned from conducting test marketing at a loss, the importance of hitting one’s quarterly numbers, the value of customer growth to a startup seeking capital, and many other factors.

    A Freakonomics-style analysis would look at a broad range of market factors before reaching conclusions about search marketing growth, and might yield some very unexpected conclusions. The prices of keywords might turn out to have as much to do with the captial markets and the availability of startup capital, for example (as the price of magazine pages did in 1999), as they do with the marginal profit of incremental sales.

    One thing you can be sure of is that, if FTD had NOT already hit its analysts’ expectations, they would have continued firing all the cannons they had to do it.

    Since these kinds factors expand and contract seasonally, in budget and fundraising cycles, and so forth, one would expect there to be continual pendulum swings in keyword pricing relative to direct conversion value and long-term rationalization in pricing relative to NPV. Sure, any invalid activity would be a tax, but, as you rightly point out, it’s already priced into the buy side of the keyword, just like poor landing pages, bad keyword targeting, and all of the other factors driving conversion rates (and hence driving what marketers are willing to pay per click). As all of these things are optimized — and there’s plenty of incentive all around to do that — one would anticipate better conversion rates = increased return on ad spend = increasing PPC’s.

  10. FTD’s experience is not uncommon.

    If PPC search engines have a long tail, and obviously they do, they also have a very large head. IMO, those customers that are playing in the head are running headlong into a zero sum game. In many of those markets, flowers for instance, they’ve already hit their breaking point and I suspect you’ll see more and more companies that bid in mature keyword markets will start to deemphasize PPC. And keep your eye on the trademark front as well, because if companies ever get protection against Google and Yahoo selling their marks then a lot of these keywords are suddenly going to be 25% overpriced.

  11. I think it’s a mistake to conclude that self-serve, bid-for-placement advertising models must also be approaching a peak or plateau. There’s something else going on here.

    I quite agree with Greg Cohn that a fully loaded NPV must include a multitude of factors, many of which are dynamic and controllable by the advertisers themselves.

    True, prices will come to rest at some “rational” level for any given advertiser. But, what’s a rational price for one advertiser is different than what’s a rational price for another. That is, new advertisers, and better, more efficient advertisers will continue to emerge and drive prices up. Indeed, some advertisers have been grumbling about getting outbid since the dawn of bid-for-placement models.

    In 2006, as the mix of advertisers continues to change, we can expect to hear more grumbling and hissing.

    Moreover rational price for any given advertiser changes over time, as that business is forced to examine its own cost structure, better understand its customers, improve its targeting, optimization, merchandising, etc. As an advertiser makes those improvements, it’s able to justify paying higher prices.

    What’s magical about first generation advertising marketplaces (like Google’s) is that they force advertisers to become more efficient, smarter. That’s a good thing.

    The next generation of advertising marketplaces need to go a step further and better engage publishers, providing feedback so they do what they can to improve the quality and quantity of what they provide into the mix: customers.

    That’s going to be a major driver of growth in online advertising, and self-serve advertising in particular.

    Tell me: what do you think next generation ad networks look like? Where is this trending?

    I’d like to get your input over here as well:

  12. “FTD just wasn’t watching the ball.”

    I submit that Jordan’s explanation is the most accurate. Based on my information, FTD is doing a poor job of managing their campaigns. They let competitors bidjam them (heh), they let affiliates bid on their brand terms (which costs them a ton), and the list goes on.

    The only trend that this shows is that more and more companies are going to be looking for high quality ppc management.

  13. I think Greg Cohn is right in that you can’t use FTD’s experience as an indicator of anything. Show us 20 companies like FTD and then maybe there’s something to talk about.

    Click fraud is definitely a problem, but it’s not going to top most advertisers’ agendas until the market stops growing at double digit rates and keyword prices flatten.

    Generally speaking, right now, the only advertisers who are concerned about click fraud are either small businesses for whom every dollar counts or high volume spenders for whom a 1% increase in conversion rates could equal tens or hundreds of thousands of dollars.

  14. Re: Clickfraud

    Background, I ran Adwords campaigns within a few months of their launch, as well as Goto and Findwhat.

    Now turned over to staff.

    For the small shop, Clickfraud an important consideration
    But for the “big boys” as they move from traditional MadAve to PPC, will they really care?

    If you take the old Wanamaker line of “I know that half of my advertising is useless, but I just don’t know which half” (approx quote), and the fact that most traditional advertising, print, broadcast, is reaching eyeballs that just don’t care, anything will be an improvement.

    In other words, if you are a marketing manager, and are offered a measureable, quantifiable result, not the traditional survey/Nielson, “trust us” black box, once you “grok” the new paradigm, you’ll jump at it.
    Clickfraud be damned … it’s better than what you had.

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