Google’s Declining CPCs

Google’s CPCs have declined yet again. 9% year on year, 15% quarter on quarter. They still trousered enormous profits, and once again the market responded by catapulting their share price even higher.

But that decline in CPCs is quite an important little niggle. I’ve remarked before that the profit margin for fungible goods trends to zero, meaning that at some point advertising using the pay per click model becomes unsustainable. Ultimately only a handful of big retailers have enough play in their margins to afford to fund advertising with a sub 5% conversion rate on desktop, and an even lower conversion rate on mobile.

This is why Google are scrambling to sell bigger ads and looking for ways to crank up mobile CPCs, with the same ultimately self-defeating logic. If Google take more money out of the market, then fewer retailers can compete. And if fewer retailers can compete, CPCs have to come down. Economics 101.

In a normally functioning market, falling CPCs should entice other retailers back in, but a lot of retailers have been so burnt that they’ve either gone out of business, or would rather just suck up transactional fees on eBay or Amazon – which they only accrue on an actual sale, rather than spending lots of money getting people to a website that might not even convert.

By shifting to Amazon or eBay, all the usability work is done and they effectively get brand protection, because people will think “I bought this from Amazon” and not “I bought this from Company X through Amazon.” Another reason then for businesses wonder why they should subsidise a brand and a website when there’s a whole ecosystem to sell through with a captive audience and where agencies can’t intervene with fees and advice that might turn out to be wrong.

Average CPC itself is a fairly useless metric to look at, but it does point to the bind Google now finds itself in. To increase revenue in a time of decreasing CPCs, they can only increase the number of ads or the eyeballs they serve – hence their ever-increasing cycle of acquisitions and search for revenue streams outside paid search. When you look at Google Play, Android Store and the various automotive initiatives, you can see what they’re gunning for: alternative revenue streams and a way to stay inside the customer journey in a way that appeals to advertisers with sufficiently deep pockets.

Case in point: the rolling out of the “store visits” metric. Google want to show that people who searched on Google then turned up in store – presumably with the intention of buying. Android users or people logged into the Google app can physically be traced. If I search for toasters on Google today, then turn up in John Lewis or Argos within a couple of weeks, that is a demonstration of Google’s value to a retailer. It’s a high tech version of a coupon in the local paper.

There’s a hint of desperation to that, in my mind. Almost any purchase with a research cycle is going to involve Google today, so the unique attribution (and therefore value) is pretty thin. Consequently, there’s not much value to the retailer to warrant spending more on Google.

Google is now so much of an infrastructure it’s almost like the Highways Agency saying you should advertise on billboard because people drove to your shop on a road they built. It’s true, but doesn’t quite add up.

And, irony within irony, Google’s conscious strategy of favouring big brands means that SEO and PPC alike make it almost inevitable that anyone searching on Google will encounter a big brand, even if the big brand spends a relatively minimal amount on either of these approaches.

In effect, Google are increasingly selling AdWords to a smaller subset of customers who actually don’t rely on Google in the first place. If you are a small business, you cannot compete on price in an auction based system if you sell physical goods. And the sort of proof-of-attribution model Google are working to is useless if you are a single site who sell nationally through the internet as your footfall is effectively zero. You’re also locked out of the SEO sphere by the big brands who can afford massive marketing pushes, and who escape penalties that would literally finish you because Google has to show them for the sake of their own credibility.

What’s that all mean? Well I’ll be damned if I know. If the last year has shown me anything it’s that I’m a terrible prognosticator. But, if I were a betting man, I’d say that Google is going to continue its trend towards being a playground for big brands and that small business in physical goods will continue to migrate to the Amazon/eBay model. The service industries will hang on to their local/personal diversity for longer, but in the end the same logic will apply: for a small local business, is there any point at all on spending money on a website when it’s primary function is actually to be a line at the bottom of your business card.

Or in short: will the “free internet” be reduced to a wasteland of useless, expensive advertising hoardings?

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Sidebar: search Google for “Google declining CPCs” and the first page is horrible. Apparently that’s a query that deserves neither quality nor freshness. That no fewer than 3 of the top 10 results for that query don’t mention “CPC” or “decline” at all is further evidence (if you’re so-minded) that Google’s focus on search quality is less than stellar.