Be Wary Of Advertising Suggestions From The Search Engines

Slave to One Master: Wall Street-All three of the major search engines are public companies now. As private companies, organizations have only two main constituencies to please: customers and the owner(s). Generally, the owner is happy if customers are happy, because happy customers keep buying. Pre-2004, that's the way it was with Google, too. Their "do no evil" philosophy was easy to maintain when they only had to be accountable to their customers.

But when a company goes public, the players shift - a public company becomes accountable to Wall Street. Why is that bad? Shareholders are often not your customers. They are shareholders. Their main goal is to see your company grow and produce higher profits. Sounds good. But what happens when producing a higher profit means sacrificing what may be best for the customer? It's a delicate balance. But in the end, it makes public companies slaves to one master: Wall Street.

Take for example Google's 2nd quarter earnings from last year. While the earnings were up over the 1st quarter, signifying revenue growth, they missed Wall Street's expectations. And then, Google's stock price fell 7%. So let me get this straight - they turned a profit and improved upon the last quarter, but their stock price still fell? Just goes to show you - it's not customer perception, it's shareholder perception.

The Current Economic Climate-Don't think that the search engines are immune from the downfalls of the current economic climate. On the contrary! While many marketers will still tell you that PPC advertising produces high return on investment (ROI), ROI means little if your marketing budget was decimated, or perhaps, your company is going out of business. Add to that the fact that less consumers are buying and less businesses are buying, and therefore there's less searches for products and less conversions, and you may see more advertisers competing for the same set of eyes. The competitive landscape just got more competitive.

When Google went public, it was an incredible milestone for many reasons, not the least of which was a share price as high as $700 a share. Frankly - just incredible. But with the economic downturn, Google's current stock price is at $365.59 - almost half of it's high value. Still, $365/share is nothing to sneeze at. Google is being caught in the negativity of Wall Street. While they consistently deliver profits each quarter, their stock price has not been growing - likely because of overall market negativity. But just as I mentioned above, Google now is accountable to shareholders, so it's main goal isn't just increased revenue - it's meeting Wall Street expectations of revenue growth.

CPC Model Is Flawed-When the CPC model was invented in 1998 (no Google didn't invent it!), it radically changed how advertisers looked at online marketing. The CPC model offered a way for advertisers to pay based on a respondent's actions - not just a respondent possibly viewing an ad. Needless to say, this radical model, and it's incredible popularity, are part of what have driven the revenue success of Google and the other search engines.
But the CPC model has flaws, as does any marketing pricing plan. In a downturned economy, the CPC model isn't as successful. Consider the case of major advertisers, like GM.

Last year, GM budgeted $3 Billion for online advertising, which of course incorporates Google AdWords. Let's say for argument's sake that only 5% of that online advertising budget was spent on Google AdWords - or $150M. Now fast forward to 2009 and GM's current financial crisis. Do you think GM is currently spending $150M/year on AdWords? Since I'm a taxpayer, I hope my tax dollars are not going to GM's PPC program!

So think about what that means for Google. If GM were to stop advertising with AdWords, that could be a $150M blow to Google's bottom line. Ouch! But not only does Google lose revenue from the actual advertisers that pull out or scale back, but they also lose revenue as actual CPC slips with it. How does that happen? Say for example that GM was bidding for the #1 position on the term "cars". And for argument's sake, let's also say that they are bidding $2 with an actual CPC of $1.50. Now let's say that Toyota is bidding to be #2 with a max CPC of $1.49 and an actual CPC of $1.00. If GM drops out of the bidding race, Toyota automatically becomes the #1 ad - AT A LOWER CPC than before. Now Google would be losing $0.51/click with the loss of GM's ads.

This also happens when advertisers simply cut back ad spend. As advertisers cut back budgets and bids (to the tune of 8% in 4Q2008), overall ad revenue slips, making it tougher for Google to meet Wall Street's expectations for growth - even if Google is highly profitable