Google Quality Score Raises Profits 69%
Last fall when Google started in with the Quality Score, it caused a real big shakeup in the PPC arena. Bids increased dramatically, affiliates were taking a beating, and all around people using Google’s AdWords system were crying foul. Over time Google has adjusted their Quality Score system and has fine-tuned it now to the point that they are at least willing to openly talk about how it is calculated into your bid price and how you can use the information they provide you with to better understand your Quality Score.
At the time that the Quality Score got started, my first reaction was that Google is going after the affiliates by artificially driving up the click prices. If Google could price affiliates out of the market, affiliate sales would drop and the companies selling would have to go directly to Google to be able to make those sales again. Google would then be able to charge a premium to companies wanting to get back the sales that their affiliates once generated. By the time Google got around to having their own CPA/Affiliate Sales program, the damage to affiliates would be done and Google’s profits would be up.
Flash forward to now, Google announces that profits are up 69% due mostly to their core search and advertising businesses. In fact, a New Yorks Times article had this to say about how profits rose so sharply:
For example, Mr. Schmidt said that just as in previous quarters, the
company devoted significant resources to continuing to perfect the art
of linking search results with ads that are tailored to users’
interests. Since, Google is paid when users click on an ad, those
efforts translate into higher profitability.
“We are showing fewer ads and those ads are worth more because they are better targeted,” Mr. Schmidt said.
That’s right, Google is showing fewer ads at higher prices because of the quality score inflating prices. Couple that with all of the recent news about Google now owning the 3rd largest affiliate company out there, Performics, and you have a perfect storm for what’s coming next…
Google buying Performics by way of DoubleClick gives them the ROI performance data for A LOT of different affiliate programs. That means that now Google knows that Product A which costs 10 cents a click converts about 1:20 or at about $2 per conversion, YET, the merchant is willing to pay $20 per conversion. Now, if Google cut out the advertisers on those keywords and made themselves the only advertiser on those keywords(or even the top advertiser) their profits go up by 1,000% in that niche. Multiply that times however many affiliate products there are out there and that’s where Google is probably headed.
This all boils down to the fact that Google realizes that they are only harvesting in some cases 10% of the value that their search engine generates. I guarantee you that Google plans to harvest a lot more than 10% going forward and the latest news about Performics and their financial performance only supports my view on that.
April 22nd, 2007 at 11:08 am
Blackbeard,
Interesting post!
It’s not a surprise that Yahoo launched Panama as a result of falling so far behind Google in terms of paid search revenues and profit. It’s also no surprise that two weeks ago at SES – New York MSN announced that they too will be using a “Quality Score” analysis to set bid prices and rank ads.
In terms of Google using affiliate marketing data to determine ad value…that’s makes some sense. Ultimately, the question becomes whether or not Google will ever allow advertisers to automate return-on-investment. If they do then you have a situation where competition will drive up ROI’s since smaller companies wanting to grow or larger companies willing to overspend to dominate will drive prices high – who’s the real winner if Google provides ROI automation? Google, over the long run, advertisers over the short run.
Thanks for the guest blogger post – it definitely has me intrigued!
Kris
April 23rd, 2007 at 12:01 am
[...] I should probably lay off of the negative Google posts, but it seems to be a hot topic now of days. [...]
May 7th, 2007 at 10:26 am
[...] I recently blogged about Google’s quarterly profits jumping 69% mostly in part to the new Quality Score. Today I was thinking about quality score and how it really changes the Google advertising ecosystem. See, AdWords is the centerpiece of a much larger marketing system that includes AdSense, video ads, and even PPC ads that you see on domainer landing pages. The so called “quality score” assigns an arbitrary score to an ad based on factors that are largely unknown. The real changes that “quality score” provides are a negative impact on the ROI for most AdWords advertisers and a positive impact on Google’s profit margins. Thus, in effect, the profit scales have tipped back in Google’s favor a bit more because of “quality score”. [...]