Big generic search terms are inevitably unprofitable

Before we start, I'll put my hands up; I can't prove the statement in the headline of this post. We just don't have enough data. But with that out of the way, I'd like to try to persuade you that it's true.

Whenever I look at a new or prospective client's generic search data, it invariably contains some big generic search terms for their market and also, inevitably, the cost per sale on those terms is way over target.

I'm talking about search terms like "savings account", or "holidays", or "mortgages". The really obvious generic search terms for a market, with no qualifying words attached.

This result has happened often enough now, that a pattern is starting to emerge. I think it's almost always true that the big generic search terms are overpriced. They are - by definition - unprofitable. I'd like to show you why I think that.

Take the search for "European holidays" in the image above. It's a broad enough term that the chances of an individual clicking through and converting from it will be low and it's interesting to enough companies that there will be a lot of potential bidders in the auction.

What's important here is that search ads are priced by the bids in an auction.

A favourite tool of economists when they don't have enough data, is to assume away complications and then see what the world would be like if their assumptions about a market were true. The limitations of doing this are obvious (in that if your starting assumptions are wrong...) but it's still a useful exercise. In essence, a lot of the time what economists are doing is thought experiments, with maths.

So what would the "European holidays" search auction look like if...?

- Each company had perfect information about their search ROI (including any 'attribution' or 'paths to sale')

- Each company was the same size, with the same profit margin and sold the same quality of product

- Each company had the same search quality score (so they rank the same on Google for the same bid)

- Each company had the same conversion rate from their search ads

We've got a load of identical companies, who truly understand return on investment (ROI), all bidding for the same search term. Here's what would happen.

One company bids for the term "European holidays" and starts to sell its product. Then a competitor bids a little more, because they can still generate a positive ROI, at a higher bid. Another competitor bids and the bids keep rising. The profit per sale keeps falling.

Eventually one company bids high enough that they make exactly zero profit from running ads on that search term.

And we stop. Everyone's got perfect information about ROI and nobody's going to bid high enough for the term "European holidays" that they start to lose money.

In a market with perfect information and identical competing companies, nobody makes any profit from generic search, because if they do, somebody else will always bid the auction for that term up a little higher.

Actually, it's worse than that. By owning generic search for now, a company might be able to drive its competitors bankrupt and then reduce bids in the future, once they've gone.

Even in a market with perfect information, there's an incentive to bid up a search term's price until it is unprofitable.

With me so far? Now let's break one of the core assumptions I listed above. We'll leave everybody in a market with competitors who are exactly the same as them, but take away their ability to measure return on investment.

Now what happens?

Some companies will underestimate their generic search ROI, some will get it right and some will overestimate it.

The ones who overestimate ROI, will bid too much.

Maybe those companies think that generic search ads cause a lot of brand search - much more than is actually the case. Or they can't track customers all the way from clicks to sales and they wrongly guesstimate the link between the two. Whatever the reason, they overcook their bids because they can't measure ROI accurately.

This means that even if you're a clever company, with perfect measurements of ROI, you can't bid profitably on the search term. You can't bid because there's another company, with a less capable marketing director, who's sent the auction price too high.

This is disappointing.

Google doesn't just auction one paid search position, it sells a few, so you may be OK if you bid to rank lower in the list - it depends how many companies are overcooking their ROI estimates. One fool bidding means that the top spot has gone. Two or three and now you're just fighting over the smaller side-bar ads. It doesn't take much for bids on the whole search term to be overblown.

As an economist working with search data, this is what I see; a market where imperfect information means auction bids on high volume generic terms are forced up to an unprofitable level in almost every sector.

The only exceptions to this rule would come when we break some of the other assumptions that I listed above. You need a higher profit per sale than your competitors, or to have a better conversion rate, or a better quality score, to be able to profitably bid higher. This is why smaller generic terms often work well, because you bid on the ones that convert best for you - the ones that play to your company's strengths, where you have a better conversion rate than your competitors.

But when you don't have a competitive advantage - when the search term is very general - we come back to a serious issue.

Big generic search terms are inevitably unprofitable.

Measuring social: Even Q couldn't do it.

I'm sure you've seen this video from Coke Zero. It's brilliant.

Best example of a marketing viral I've seen in ages and I'm sure the Coke Zero social marketing team are giving themselves well deserved pats on the back.

This one's going to turn up in every "how to do social" slide deck that gets produced in the next 12 months. It's a rare example of a social campaign where nobody's going to argue with the value. Any marketer would be proud to have it on his CV.

But what if finance got awkward?

What if they insisted you'd never be allowed to pull a stunt like this again, unless you could prove it sold some bottles of Cola?

Well then you'd have a problem.

I've posted before that for a variety of reasons you've got virtually no chance of linking social media activity to sales. Actually, let's rephrase that. There are hundreds of ways to imply a link, but it's virtually impossible to prove a link, mostly because it's hard to get good audience data on who saw the viral and when they saw it, plus any positive effects it has on sales are likely to build up slowly, so looking for an immediate spike won't work.

We've all seen loads of 'how to measure the ROI of social' articles, which then spend five hundred words avoiding the question, but for once, I'd like to hit that question head on. First of all, for ROI in terms of additional sales, forget it. Even if you've got sophisticated econometric models in place you'll be lucky to pick up the effect. So here's what I'd do.

Your answer is going to need a £ figure in it, because you're talking to finance. Loads of Facebook shares and positive Twitter sentiment isn't going to cut it.

That YouTube video's got 3.8m views, so line up your social campaign vs. the alternatives. How much would it cost to run a TV advertising spot that achieved 3.8m impacts?

Actually, not that much. In the UK, take an average adult cost per thousand impacts on TV of £5 (ish) and you're looking at an equivalent value of... £19,000.

Damn, that's not very impressive. Probably not enough.

Say you can show that the audience for the YouTube vid is a bit better than a blanket "adults" target. That it's younger and would be harder to reach with TV. That wouldn't be difficult; if nothing else, you could show that YouTube users in general are younger and so your viral audience probably is too.

Now you might be able to justify a cost per thousand of around £50, rather than £5 because hitting younger viewers with TV spots is expensive. Your equivalent media value is £190,000. Better.

But hang on, that video is two minutes long, not the standard 30" TV spot. Four times the spot length, gets us to a value of £760,000.

That's more like it.

It's also more good evidence for why you'll struggle to measure a social media effect on sales. A global TV campaign for Coke with a budget of £760,000? Don't make me laugh. It's a drop in the ocean.

Once you've got a nice solid financial number, you can layer on some softer metrics, always referring back to  what it would have cost you to expose that audience in a different way. Did you gain Facebook followers? Great. They're valuable because you can talk to them again, rather than spending money somewhere else.

Shares on Twitter? Careful, those people are already in the YouTube plays number.

New followers on Twitter? Lovely, just like the Facebook ones, they have a value because now you can show them more advertising messages.

The last step you might want to try is that direct link to sales. You won't be able to prove it (I might have mentioned that) but you can imply it. If there's a general ROI to TV circulating in the business then you've just put social in the same space as that media, so you can potentially borrow it. How many sales would a TV campaign of that value have generated?

You might also be tempted to make the case that somehow Facebook advertising messages, or YouTube video views are 'better' than TV spots - that they're more engaging and with higher impact - but be very, very careful. You're doing this exercise for finance and they're almost certainly starting from the viewpoint that an ad is an ad, no matter where it's shown. Do you have rock solid evidence that it's better (ROI better) to talk to people on a social network than on TV? I don't. In fact I have the opposite, because you're more likely to be talking to existing customers.

Do what you can with the real financial metrics and accept that sometimes, your equivalent ROI number isn't going to look very impressive. After all, we've just proved that the best viral we've seen this year is probably worth less than running £1m worth of the same creative on TV.

How to guess your marketing ROI

I spent yesterday morning estimating a client's marketing uplifts. Well, when I say estimating, guessing would probably be more accurate.

There's nothing especially wrong with that. If you haven't got any idea what your marketing ROI might be, an analyst can usually put you in the right ballpark with a small amount of effort and some 'creative' use of sales data.

There are two ways of going about guessing your marketing returns. One is right and the other one feels right, but leads to totally unfeasible levels of sales almost every time.

Lets start with the wrong way. You know those people who get their business plan laughed off Dragon's Den? The ones who say "I've made a product for the pet care market and the UK pet care market is worth £1.5bn per year. If we just get 0.5% of that..." Then Peter Jones cuts them off and asks how many kitty litter boxes they sold last month. And the answer is less than ten.

When you say "My competitors combined, have an 80% share of market. If I can just get x% of that" you're making exactly the same mistake. Or The other one you hear a lot is "there are loads of people who only buy my product very occasionally. If I could just turn 10% of them into regular users..."

The right way to do it is start from where your sales are now, plus the sort of marketing spikes you can see in the past, with some sensible adjustments bolted on. This gives a much smaller number than the first way, but is a lot closer to the truth and won't get you laughed at on the BBC...

All those people who don't buy your product now are not buying it for a reason. One ad isn't suddenly going to make a lot of them change their minds.

Why your campaign doesn't work

A recent conversation with a planner (who shall remain anonymous.)

"We'll run TV when we've got something to say and fill in the gaps with outdoor."

Don't you dare complain when an analyst tells you that your outdoor campaign didn't have any effect on sales...

The Red Queen

It's all about return on investment. You can't blow millions on an advertising campaign without showing that it's had some kind of effect - so how do you show that sales have gone up and your TV spots were worth the money?

You use econometrics.

An analyst - somebody like me - builds a statistical model, which proves that while your campaign was on air, sales went up by 5%. Job done. Except that for the advertising to be profitable, sales needed to go up by 15%.

What's suprising is that this happens all the time. Econometrics 'proves' that advertising is unprofitable, companies worry about that for a month or so and then carry on running ads anyway.

Some of the time the stats are probably right and sales uplifts really are disappointing, but they can't be right all the time surely? Or a few companies would have worked out by now that they'd make more profits without advertising and the stock market would be punishing any who were still throwing their money away.

Econometrics must be missing something. The real sales effect must be larger than marketing models say it is.

This is where the Red Queen comes in. Econometric models measure things changing - it's how they work. The statistics are a complex way of looking at how much product is sold in a week when advertising is running, compared with when it isn't.

In a mature market, where everything is fairly stable and all the brands are advertising at about the same level, econometrics will say that advertising uplifts are small almost every time.
Is econometrics right? Lets think about what would happen if one of the brands suddenly stopped running ads. Nothing happens in the first week, or in the first month but after a longer period of time, sales might start to slowly slide away.

Econometrics can't see this bit of the return on investment. You could say that market mix models can only measure the aggressive bit of your advertising - the bit that's stealing from competitors and winning new customers. They can't measure the defensive part that stops competitors stealing from you. And that defensive part could be much larger.

Statistical models have their place, but they're just one piece of the puzzle. Before you had a model, you didn't know anything about your advertising ROI. Now that you've got a model, don't let the analysts pretend that you know everything about it.

Red Queen? You can run as fast as you like, but if you're staying still then how can we measure you moving?