10 reasons why ad words is “cheaper”

Last week while most red blooded union jack waving sports fans like me were distracted by the glorious sight of Bradley Wiggins riding to victory in the Tour de France, Google announced an 11% rise in second quarter profits to $2.8 billion.

Why the analogy? Well behind the impressive headline figure Google had to ride their own bike pretty fast to keep moving forward in the past year. While ad word clicks were up by an impressive 42% on April-June 2011, the average cost per click was down 16% in the same time period, a trend which has been noted by Wall Street analysts as a “recurring challenge.”

So what explains this drop in ad word prices? Well here are 10 of the most likely contenders (in no particular order) based on our own research.

1. Currency: At least some of the trend has been explained by currency fluctuations, and more pertinently the relatively weak dollar which is driving down the relative value of bids from outside the US. With the dollar showing signs of strengthening in the last couple of months this trend may boost Google’s profits in the latter half of 2012.

2. Mobile: The rise of mobile PPC may also be a factor, indeed Google’s CFO Patrick Pichette explained to this effect, albeit vaguely, with reference to advertisers still “figuring out the value of mobile advertising.”

3. More advertising space: Another reason could simply be the sheer number of advertising spaces now on the page has driven down cost for visibility but increased the volume of paid clicks. Better for Google, and, at least in theory, better for the advertiser. Not necessarily better for the end user though as the distinction between paid and natural search for the user continues to be blurred.

4. Search engine competition: This will likely be driving down prices too, and with Bing’s growing US share and Baidu seemingly cornering the Chinese market, the pull of Google ad words, while hardly on the wane, may well be starting to decelerate.

5. Internet usage growth in developing markets: The growth curve in internet usage continues unabated globally, but with the largest economies in the world now fairly mature we’re logically seeing a gradual leveling in the distribution of clicks across the world, a trend which would exacerbate a downward turn in click prices as advertisers in emerging economies simply don’t have as much money to spare.

6. Social media: The growth in social media and other alternative media provide increased competition to paid search advertising, thus dampening demand in more mature ‘early adopter’ markets.

7. Lack of transparency: Google have been busy adding more and more features to managing an ad words campaign, but have in turn made it more difficult to detect exactly where a click came from. So more clicks but more confusion with it?

8. The financial sector: Google profits rely heavily on the financial industries, and with the price of saturated markets such as PPI, loans generally on the wane, Google it seems, is having to find cheaper clicks elsewhere.

9. Savvy advertisers: As advertisers get more experience, they are realising there’s more to turning a profitable ad words campaign than just winning a bidding war. Savvy advertisers realise that it doesn’t always pay to be first, it’s all about conversion.

10. Savvy consumers: Likewise customers are more experienced. When was the last time you clicked on the top ad word listing without thinking? The buying process has become far more sophisticated and with savvy consumers looking for value, advertisers are cottoning on to the fact that if you pay to be first, you may not be the cheapest.

So, can we interpret Google’s results as a sign that ad words prices have reached the top of the mountain and are now racing down the descent on the other side? There’s a big difference in global trends and individual keyword searches of course, so the answer I’m afraid is bound to be mixed and dependent on the competitiveness of your market.

Whether Google is pedaling towards its’ own summit remains to be seen, but where ever the reasons for the downward trend in ad words prices lie, this fact alone provide a distinct logic to Google’s increasing product development and diversification of interests.