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.

How do you ask "Europe - yes or no?"

The proposed question for a referendum on Britain's membership of the EU has been published today, over on Guido Fawkes's blog.

What interests me is that the wording has changed subtly in the final draft, from:

“Do you think that the United Kingdom should remain a member of the European Union?”

To:

“Do you think that the United Kingdom should be a member of the European Union?”

Now as a eurosceptic Tory, why might you want to do that?

It's for the same reason that Alex Salmond was very keen on a certain wording for the Scottish Independence Referendum.

The first question's wording above, has an element of "status quo bias", which has nothing to do with three chord rock songs and everything to do with the fact that survey respondents will tend to agree that things should stay the same as they are now, if you encourage them to do that.

The UK should remain a member of the EU.

vs. the UK should be a member of the EU.

Subtle difference, but if you're a politician chasing votes for your own point of view, you'll grab every little advantage you can get. It's very hard to write a completely neutral question, so you might as well have the one that favours your own position!

Still, at least we can hope that this referendum won't be carried out by Premier Inn.

We get the social networks we deserve

Is social getting silly yet? I tend to think it got silly a while ago.

Instagram went for $1 Billion.

Waze (has anybody heard of Waze?) will shortly go for a similar amount, to Google.

Facebook has acquired 35 companies since 2007, mostly for undisclosed fees.

And Twitter could be worth $11 Billion if it floats.

Doctor Evil shouldn't have phoned the UN to demand daft sums of money, he should have threatened Facebook's bank manager.

So what's the problem? If big companies want to spend Billions acquiring smaller companies, which have lots of users but no revenue, then that's their business.

It's our business too. Here's the problem.

Yes, that's a cliché. It's a cliché because it's true.

Somebody has to pay for Facebook and Instagram and Twitter and all the other social toys. Facebook's data centre is so big, it's having problems with the air conditioning forming rain clouds and drenching the servers. Yes, really. You can't fight the weather, so instead, they've waterproofed the servers.

We can be fairly sure that data centres big enough to fit rain clouds in are very, very expensive.

Advertisers are paying for all of this, which indirectly means that you and I are paying for all of this, with our attention and our changes in purchasing behaviour.

That creates two problems and I've talked about one of them before. The pot of advertising money isn't getting bigger, which means there's a limit on how many businesses can be supported solely by advertising and how good their products can get from a user's point of view, before the money runs out.

Today's it's a slightly different issue. Today's issue is that social networks aren't built to be the best social networks that they can be for you. They're built to be the best that they can be for advertisers.

That is the essence of the title of this post: We get the social networks we deserve. We want free stuff, so we get the minimum quality product that will hold our attention, so that we can be advertised at. Being the best for advertisers means lots of eyeballs at minimum cost. A news feed is 'better' if it can fit more ads in it, without driving too many users away, not because it communicates news more effectively. Mobile is 'worse' unless you can figure out a way to fit some adverts alongside the content on a smaller screen.

You ask for free? Then you deserve second best.

Imagine for a minute that you couldn't put any advertising at all on a social network. Either it's impossible, or it's illegal, or nobody believes it works, so no businesses are willing to buy the ads... Whatever reason you like.

Time for a thought experiment: What might social networks look like if their users were the customers?

The first difference is obvious - you'd have to pay for them directly somehow. So now we're looking at Facebook for $5 a month?

Actually no, I don't think so, and this is where it gets interesting.

Centralising everybody's social data onto a data centre so big that it has its own micro-climate is stupid. The only reason for doing it, is that Facebook needs everybody's information in one place so that they can data mine it for targeted advertising (well that, and to make things easier for the NSA).

If we're not advertising, we don't need to centralise the data, so what happens now? What I think happens now is that you can have a distributed social network, built along the lines of the internet itself. In essence, what Facebook does with your profile, is the social equivalent of there only being one website hosting service in the world and all of those websites having to use the same template.

Without advertising, you wouldn't have everybody paying Facebook to host their data. You'd host your own profile on any server that was always-on, in the same way as you can host a website for a few pounds a month.

You could customise that profile however you like, since in the end it's just your personal website, but with a central news feed that announces new content. There's already a good way for websites to do this, through RSS. It's easy to imagine a lively open source community of personal profile templates that would make design easy and I'm sure we'd all rather not go back to the technicolour car-crash that was the original Myspace.

If you like, imagine your social profile as an app that you can install on any sever, for a few pounds a month. It can host photos, videos, blogs, plugins that let you tweet... a whole host of exciting things. Ten years ago this would have been difficult and techy, but there's no reason it should be now. The internet was actually headed this way, with lots of people having their own personal websites (slightly geeky people, because it used to be slightly tricky) before Myspace and then its more modern brethren came along. You used to get some free web hosting space with your internet connection and without Facebook or Twitter, that model would quickly re-emerge, so that hosting your profile(s) wouldn't even cost you money directly.

The final piece of the puzzle for an effective social network without a Mark Zuckerberg to own it, is another - probably open source - piece of software; an aggregator for all of your friends' news feeds, that becomes your "Facebook". That's very easy, as each friend's website is announcing new content and you just have to pick it up as it gets announced. If you use any kind of news reader then you already know how simple this is. The clue's in the name; Really Simple Syndication.

You'd need a way to set some, or all, items private but that's not hugely difficult either and can be handled by  the (open source) software that's driving your profile. There are sites all over the web with private and public areas and yours would have those too.

Without advertising, I'm convinced this is what the social web would look like; individual sites that each have some of the character of their owner, announcing new content to the world, so that friends can find it. The advantages for us, as users, would be substantial...

You own your data. Nobody (I'm especially looking at you Facebook) is incentivised to undermine the privacy of your data in order to sell adverts. And even if they were, they don't have it.

Social tools are built to appeal to you, enough to actually pay for them. They will be better than the ones you have now. Nobody gets to pay to 'promote' content in your news feed that you didn't ask to see.

Your social profile can be whatever you want it to be, rather than a homogenised blue and white. You're a photographer? Make it visual. Writer?  Add a blog. Musician? Host music. Love Hello Kitty? *Unfollow*. Some profiles would undoubtedly be garish, but modern templates would help. We've come a long way since Geocities.

You can divide up your social world however you want and have multiple personalities - work, leisure, hobbies, whatever you want, as separate sites, or just separate news feeds within one site. Nobody's trying to get the whole you in one place so that they can sell you stuff. Google+ tried to do this with circles but they screwed it up. With your own site (or sites) you can have multiple news feeds and please do create a separate baby news one, so that the rest of us can choose not to follow it.

I'm sure there are more... The really big one is that all the tools are being designed exclusively for you. Currently, social tools are designed 'for you' in the same way that fishing bait is designed 'for fish'.

And we're back to the original point.

A modicum of effort and a couple of pounds a month, would see a social networking revolution. But we like free and so we get the social networks we deserve.

Fixing the advertising industry (warning: this post is unlikely to fix the advertising industry)

I got involved in a bit of a heated debate yesterday over on The Ad Contrarian's comments section as a result of a post called "Time For Sorrell To Go". The post is a lament that working in advertising isn't fun any more because huge media groups, focussed on the bottom line, have driven the craft out of the business and commoditised everything.

"They have made it leaner and meaner. They have made it more efficient. They have made it more productive. They have squeezed all the fat out of it. They have also squeezed all the life out of it.

They have replaced ideas with data. They have replaced value with efficiency."

I wasn't around for the good old days, but anybody can see how huge companies work and not just in advertising. They're relentlessly focussed on the bottom line.

This is obviously less fun than not being relentlessly focussed on the bottom line.

Oh and before we go any further, I work for Martin Sorrell. Indirectly anyway. Half the people who work in advertising work for Martin Sorrell. Best be careful with this post, eh?

Most of the complaints about WPP, Publicis, Sorrell et al. could equally be applied to the music industry, or book publishing, or newspapers, or Hollywood movies, or...  Essentially, this is railing against capitalism, as a system that encourages a singular focus on short term financial profit.

Many of our clients demand a minimum acceptable standard for their advertising and they want to achieve this standard at the lowest possible cost. That's unlikely to be exactly how they'd describe it, but that's what they do.

"You know we're sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn't it?"

Rockhound (Armageddon, 1998)

This is advertising built by the lowest bidder. It comes from a belief that in reality the minimum standard isn't so far short of the best, that excellence is worth taking risks to achieve. Let's be honest, in many cases that's true.

Any complaint about a WPP inspired race to the bottom that doesn't start by recognising what our clients want is just howling at the moon. Some of the comments on that original blog post (which is partly what dragged me in) bemoan the fact that it's "all about the money".

Well, yes. That's capitalism unfortunately. Advertising agencies are selling a way for companies to make more money. It's what we do.

In my opinion, this is why creative agencies have (largely) lost the 'lead agency' battle; they keep trying to argue that there are good things about adverts, beyond how much product they sell relative to how much they cost, and even if the client Marketing Director falls for it, the Financial Director won't.

Let's get one thing straight right now. A famous ad man once put this better.

The only legitimate purpose of private sector advertising is to sell more of a product.

It has no other benefits to the companies which pay for it.

If you can't handle that, you're in the wrong business.

Everything else is strategy. Sales now or later? Sales through acquisition or retention? Sales by appearing to be cool, or safe? Sales through happier employees? Sales by annoying people or by making them like you?

I don't particularly like that either, but that's the way it is. I think we should all work flexi-time four day weeks, spend the extra free time in the countryside and the world would be a happier place for it, but it's not going to happen. You can't expect a client to pay extra to run their adverts, just to make you a happier employee.

We're advertising in the big media groups' world. It's probably less fun than the times when clients paid more, there was more slack in the system, everybody had more time to be creative and if you didn't come back from the pub after a heavy Friday lunch, well, that was ok.

We can rant about it, or we can do something constructive.

"Screw the system." 

"No, not screw the system. 

Massage the system, 

play the system, work the system... 

but don't screw the system because 

the system's gonna screw you more."

The Chase (a fairly watchable Charlie Sheen B-Movie) 

Big advertising agencies aren't invincible, but they're winning because they offer what clients want.

If you want to do things differently, you have to make a strong case that your way is better.

"Better" means creating more sales with your adverts.

Don't roll your eyes. Read that last point again.

If you can't make the case that your way is better, what are you doing here?

You're an ad man.

Sell it to me.

Football model: Beating the bookies!

Well that was a lot of fun. Starting out with a subscription to EPL Index statistics, I decided in January this year to have a go at building a predictive model for Premier League football games. Wallpapering Fog's been a record of the development and predictions (all posts here) and has done a great job of keeping me motivated. It would be easy to skip a week's predictions, when you've got a hangover on Saturday morning and real-life stuff to do, but publicly committing to posting has worked. It's also turned up a fascinating community of analysts, who I'd probably never have read otherwise. Isn't Twitter brilliant?

From a personal point of view, it's been a massively satisfying project. If only because I've wanted to build a proper agent-based model for ages, but couldn't figure out something really interesting - with good data available - to throw the technique at.

The good news is, this all means the model will definitely be back next season!

I didn't originally build the model to bet with and had only ever placed a couple of fun bets in my life until this year (you know, Exeter City to score against Man U, that sort of thing. Geddon Ciddy.) But then I lined up some simulations of past games from the model against the bookies, as a test to see how it compared. It won. So naturally, I started betting...

The first post with actual results picks in it, as opposed to just percentage chances, was the 2nd March and then we had every game until the end of the season. Richard Whittall has written an interesting post today about the psychology of forcing yourself to bet and that's exactly what I've been doing. No attempt to identify systematic errors in the bookmakers odds, or to find the best prices in the market, just pick a winner in every game and bet on it.

Here's what happened, with a £10 bet on each game*

*Technically, I wish it had. I actually ran for a few weeks at a quid a game, because I'm a coward.

Overall the model called 55% of results correctly, which is a fraction higher than back-testing suggested and would probably settle to something closer to 52% over more games.

That number at the end's nice though, right? With a £100 bank to start and betting £10 a game, three months later you've still got your original £100, plus £166.50. And plus £100 bonus for opening a new account too, if you've got any sense.

Loads of development to come over the summer. But for now, the drinks are on Wallpapering Fog.

Football model: Last predictions for 2012/13

Chelsea v Everton - Home win
Liverpool v QPR - Home win
Man City v Norwich - Home win
Newcastle v Arsenal - Away win
Southampton v Stoke - Draw
Swansea v Fulham - Home win
Spurs v Sunderland - Home win
West Brom v Man U - Away win
West Ham v Reading - Home win
Wigan v Villa - Ridiculously close! Home win

What's an analyst selling?

When we offer analysis in any field, what are we selling? I mean what do we really offer, right down at the core of it?

There isn't always an easy answer. A great story that makes this point is the one about the advertising consultant who was speaking to Parker pens and asked them what business they were in. What do Parker pens sell?

Pens, they said.

The consultant disagreed. He said Parker were in the gift business and that the gifts happened to be pens, and he was right. Nobody buys an expensive pen for themselves.

If you understand what you're selling, then you can sell it better. You can also future-proof yourself and not go the way of Kodak, who thought they were in the film business and not the 'taking photographs' business, so ignored digital cameras for a long time, despite having invented the first one in 1975. You go bankrupt by not understanding what you really sell.

So back to the original question. What do analysts offer?

Answers... Numbers... In advertising, I could tell you that spending a million pounds on TV will make you two million pounds in extra profit. In football, an analyst could tell you that signing the latest bright young thing from Italy should increase your points total for next season by ten.

That's the visible output from our work, but why does a decision maker want that information? In one word, what is the analyst selling?

Certainty.

In an uncertain world, we sell certainty. Confidence. The ability to know.

Since I've started analysing football, two themes keep bubbling up in conversations among football analysts on Twitter. One is a huge frustration that clubs appear not to be listening to the analytical community and what it thinks it can add to the game. The other is the large role that luck plays in winning football matches.

I think these two are related.

As analysts, we're hugely interested in chance because it sets the limits of what we can know for certain. In a football match, we obviously can't predict the bit of the result that is down to luck. If two teams are incredibly closely matched, who will win? It could come down to inches either way, on just one shot in the 90th minute, that strikes a post.

In a sales model, we often have measures which we're not statistically confident about. The model says that a marketing campaign is probably working and generating extra sales, but it isn't sure.

This is a problem, when what you're selling is certainty. Undermining the certainty that you sell is a Bad Thing.

What do we do? Do we make claims that aren't substantiated? Offer 100% certainty, even though we know it doesn't exist? Some people do. They quickly get found out as charlatans. Let's not do that.

What we can do is focus on what we know and move slowly onwards from there, because if you've done a big piece of work and you still don't know anything with more certainty than the person who commissioned it, then you've wasted your time. Start with the building blocks that you're confident in.

In marketing, analysis has a foothold because we can do this. We can walk into a business, run an analysis, offer some certainty about the world and critically offer a set of decisions that will improve the current situation. "Will improve" in analyst language means "will probably improve" but we tread a fine line.

In offering this certainty in an uncertain world, partly what we do is transfer risk from decision makers, onto ourselves. If you hedge your bets and prevaricate about what is the right decision, all of the uncertainty and all of the risk is still with the decision maker. They're paying you to make some of that risk go away.

I've yet to see very many of these types of conclusions in football analysis; concrete, positive strategies, based on statistics, that will help to win more games. Proving what doesn't work is easy.

We think that around 35% of match results may be down to luck.

We think that sacking your manager doesn't make any difference.

We believe that winning a cup trophy doesn't make you a better manager than the guy you beat in the final.

These are fascinating things and essential to understand, but it's positive conclusions that will make the difference in getting analysis adopted in any field. If you're a football manager, what's the knowledge above worth? A consolation prize as you sit at home, sacked, that you were just unlucky?


We sell certainty. And if we don't have any certainty to sell, we've got nothing.