Imagine you’re doing some internet shopping. You want some shoes to replace a favourite pair that is worn out. You type in the name of the place where you got the last pair, and click the first link that comes up. You choose the exact same pair, sling the credit card, and start waiting for the postman.
The shoe retailer sees this: someone searched for their name, clicked the link they paid Google to install, and then went on to make a purchase. They add that to their return on investment for buying ads associated with their own company name.
But searching for a company name suggests you already know that company exists. And now a new working paper from the National Bureau of Economic Research has shown that buying the ads that sit alongside searches for your own company name is pretty stupid.
“search advertising only works if the consumer has no idea that the company has the desired product”
This also applies for ads with both the retailer name and a product in it. Like “Myer suits” or “Kogan TV”.
The research is not some wishy-washy lab experiment. It was done by eBay Research, and involved a giant control experiment. eBay started by cancelling all the paid search advertisements for terms like “ebay shoes” in 30 per cent of America.
It then widened the experiment to non-branded searches, like “shoes”
What it found was startling: “on average, U.S. consumers do not shop more on eBay when they are exposed to paid search ads.“
The reason is this. Search engine marketing causes a big leap in traffic from people that have never used eBay before. But a vast majority of people that use eBay are experienced users. because the search engine can’t target the newbies, the return on investment ends up being very poor.
“consumers who have completed at least three eBay transactions in the year before our experiment are likely to be familiar with eBay’s oﬀerings and value proposition, and are unaﬀected by the presence of paid search advertising”
So search engine marketing is still good for people who don’t regularly use your site. But here’s the rub. Among people who shop on eBay all the time (50+ purchases a year), they use paid links 4 per cent of the time. eBay pays for all those clicks and an unsophisticated measure of the effectiveness of paid advertising would therefore show that paid links are effective.
Turning off ads left eBay with 99.5 per cent of its normal sales. The differences between the period with ads and the period without are far from striking:
Obviously small companies can still get bang for their buck advertising online. But big companies perhaps less so, and that might hurt Google.
“Of the $31.7 billion that was spent in the U.S. in 2011 on internet advertising, estimates project that the top 10 spenders in this channel account for about $2.36 billion.”
The study can’t reveal eBay’s actual expenditure on Google paid search, but it uses an estimate of $51 million a year, based on google’s public statements. That delivers a return on investment of -63 per cent.
Frightening news for Google shareholders, who in the first quarter of 2014, have seen advertising revenues fall 1 per cent.