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Abstract
In search engine marketing, such as on Google, advertisements' ranking and prices paid per click result from generalized, second-price, sealed
bid auctions that weight the submitted bids for each keyword by the quality of an advertisement. Conventional wisdom suggests that advertisers
can only benet from improving their advertisement's quality. With an empirical study, this article shows that quality improvements have complex
effects whose returns are actually unclear: 5% of all quality improvements to an advertisement lead to higher prices (measured by price per click)
per keyword, 100% to a higher number of clicks, 53% to higher costs for search engine marketing, and 37% to lower prots. Quality improvements
lead to higher weighted bids, which only lower prices if they do not improve the ranking of the advertisement. Otherwise, better ranks likely lead to
higher prices. A decomposition method can disentangle these effects and explain their effects on search engine marketing costs and prots. Finally,
the results indicate that advertisers benet if they lower their bids after improvements to advertising quality.
2012 Direct Marketing Educational Foundation, Inc. Published by Elsevier Inc. All rights reserved.
Keywords: Search engine marketing; Keyword advertising; Online marketing
Introduction
Since the advent and subsequent far-reaching diffusion of the
Internet, the means by which consumers obtain information has
changed fundamentally. Search engines have become the main
tool consumers use to locate information (Hennig-Thurau
et al. 2010; Rangaswamy, Giles, and Seres 2009), and this
shift has been accompanied by the launch of a new and extremely popular online advertising format, known widely as search
engine marketing (SEM), keyword advertising, and paid or
sponsored search. Such tactics accounted for 47% of total
worldwide online advertising spending in 2009, and U.S. advertisers alone spent $10.7 billion (IAB 2010).
The mechanism supporting SEM works as follows (Abou
Nabout et al. forthcoming; Skiera and Abou Nabout 2011; Yao
and Mela 2008): A consumer types a keyword, such as cruise
vacation, into a search engine (e.g., Google) and receives two
types of results (see Fig. 1). The lower, left-hand part of the screen
shows unsponsored search results, whose ranking reflects the relevance that the search algorithm assigns to these different results.
Corresponding author.
E-mail addresses: abounabout@wiwi.uni-frankfurt.de (N. Abou Nabout),
skiera@skiera.de (B. Skiera).
The other parts, on the top and right-hand side, present sponsored
search results. The display of the unsponsored (organic) search
results is free of charge, whereas advertisers pay for each click
on their ads that appears among the sponsored (paid) search results (Bucklin 2008; Rangaswamy, Giles, and Seres 2009).
For the sponsored search ads, the ranking and prices paid per
click depend on keyword auctions, which are generalized,
second-price, sealed bid auctions (Edelman, Ostrovsky, and
Schwarz 2007; Varian 2007). The two market leaders, Google
and Yahoo, use similar auction designs (Zhou and Lukose
2006): advertisers submit a bid for each keyword at the price
they are willing to pay for each click. The search engine provider weights the submitted bids according to the ad's quality,
measured by a proprietary quality score (QS), and ranks the
ads accordingly (Agarwal, Hosanager, and Smith (2011);
Kinshuk et al. 2011; Yao and Mela 2011).
From the search engine provider's point of view, the introduction of ad quality to the auction design provides a means
to deal with the hidden cost of user dissatisfaction with poor
quality ads (Abrams and Schwarz 2008; Varian 2010). Despite
the massive importance of the QS, neither Google nor the other
search engine providers publish their exact algorithms for determining the scores. However, Google states that the higher
your Quality Score, the lower your costs and the better your
1094-9968/$ -see front matter 2012 Direct Marketing Educational Foundation, Inc. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.intmar.2011.11.001
142
ranks
keyword
1
1
Google's statements about the benets of a quality improvement are even
stronger in other languages.
143
144
Table 1
Numerical example: Effects of ad quality improvements on outcomes of keyword auctions.
Input
(1)
Bid
Situation 0
A $ .50
B
$ .50
C $ .50
Situation A1:
A $ .50
B
$ .50
C
$ .50
Situation A2:
A $ .50
B
$ .50
C
$ .50
Situation B1:
A $ .50
B
$ .50
C
$ .50
Situation B2:
A $ .50
B
$ .50
C
$ .50
Outcome
(2)
Quality Score
(3) = (1)(2)
Weighted Bid
(4)
Rank
(5a)
Cost per Click
(5b)
(6a)
Clicks
(6b)
Clicks
(7b) = ($1(5a))(6a)
SEM costs
8
4.0
1
3.0/8 + .01 = $.39
./.
100
./.
./.
6
3.0
2
1.5/6 + .01 = $.26 ./.
90
./.
$23.40
3
1.5
3
min price = $.05
./.
80
./.
./.
Direct Price Effect = $.04, Indirect Price Effect = Indirect Quantity Effect = Direct Quantity Effect = 0
8
4.0
1
3.5/8 + .01 = $.45
./.
100
./.
./.
7
3.5
2
1.5/7 + .01 = $.22 1.5/7 + .01 = $.22 90
90
$20.19
3
1.5
3
min price = $.05
./.
80
./.
./.
Direct Price Effect = $.04, Indirect Price Effect = Indirect Quantity Effect = 0, Direct Quantity Effect 0
8
4.0
1
3.5/8 + .01 = $.45
./.
100
./.
./.
7
3.5
2
1.5/7 + .01 = $.22 1.5/7 + .01 = $.22 92
92
$20.63
3
1.5
3
min price = $.05
./.
80
./.
./.
Direct Price Effect = $.08, Indirect Price Effect 0, Indirect Quantity Effect = Direct Quantity Effect = 0
8
4.0
2
1.5/8 + .01 = $.20
./.
./.
./.
./.
9
4.5
1
4.0/9 + .01 = $.45 1.5/9 + .01 = $.18 90
90
$40.90
3
1.5
3
min price = $.05
./.
80
./.
./.
Direct Price Effect = $.08, Indirect Price Effect 0, Indirect Quantity Effect 0, Direct Quantity Effect 0
8
4.0
2
1.5/8 + .01 = $.20
./.
90
./.
./.
9
4.5
1
4.0/9 + .01 = $.45 1.5/9 + .01 = $.18 102
92
$46.35
3
1.5
3
min price = $.05
./.
80
./.
./.
./.
$66.60
./.
./.
$69.81
./.
./.
$71.37
./.
./.
$49.10
./.
./.
$55.65
./.
Cost per Click is the predicted cost per click for the case in which the rank has not changed such that advertiser C still scores below advertiser B. Because B's cost
per click is then calculated as advertiser C's weighted bid divided by B's Quality Score (+$.01), Column (5b) differs from (5a) where the actual ranking is used to
derive the cost per click.
b
Clicks are the predicted number of clicks for the case in which the rank has not changed. We assume for the first situations (A1 and B1) that the increase in quality
has no additional effect on the number of clicks. In the second situations (A2 and B2), we assume that the increase in quality leads to two additional clicks due to the
higher appeal of the ad and to 10 additional clicks in B2 due to the better rank.
c
Advertiser B's profit contribution per click = $1.
Notes: Bold numbers indicate changes compared with Situation 0. The min price describes the minimum price that must be paid for each click (here, $.05). All
calculations are done by using exact numbers instead of the rounded values that are displayed in the table.
following Eq. (2). We first assume that the best rank (i.e., rank
1) receives 100 clicks, rank 2 receives 90 clicks, and rank 3 receives 80 clicks.
Situation 0 represents the base case; we particularly investigate advertiser B. In Situation A1, B's QS increases from 6 to 7,
and its price per click decreases from $.26 to $.22 ( 14%). The
number of clicks remains the same (quantity effect = 0), and its
SEM costs decrease by 14%. In Situation B1, B's QS increases
from 6 to 9, which puts B in rank 1, for a 75% higher price per
click and 75% higher SEM costs. The reason for this seemingly
surprising result is that the increase in quality has two effects
(these arguments are straightforward for the reverse case of decreased quality). First, it has a direct effect and reduces the
price per click, with the assumption that the rank does not
change (similar to Situations A1 and A2). Second, the indirect
effect on price appears because the increase in quality improves
the rank, which leads to a higher price per click. Only if the direct effect is greater than the indirect effect will the quality improvement lead to lower prices per click.
We disentangle the total price effect into these two effects by
calculating the price per click that would result if advertisers'
ranking did not change in response to the quality improvement
[Column (5b)]. The difference between this price [Column
(5b)] and the price paid in Situation 0 ($.26) reveals the direct
effect that decreases the advertiser's price; the difference between the total effect and the direct effect is, in essence, the indirect effect that increases the advertiser's price. Thus, in
Situation B1 we observe a negative direct effect of $.08
(=$.18$.26) and a positive indirect effect of $.27 (=$.45
$.26[$.08]). In real-world SEM campaigns it is then an
empirical question how large these effects actually are.
Situations A2 and B2 further complicate our calculations because improvements in ad quality might also result in changes
to the number of clicks. In Situation A2, the number of clicks
is assumed to increase by 2 though the ad ranking remains the
same because the higher quality of the ad is more appealing
to consumers. In Situation B2 [Column (6a)], we assume that
the number of clicks increases by 12, which is the sum of 10
clicks added by the better rank and 2 clicks added because of
the more appealing ad. In turn, this higher number of clicks increases the SEM costs in Situations A2 and B2 (from $20.19 to
$20.63 and from $40.90 to $46.35); however, profits also increase resulting from the additionally acquired clicks (from
$69.81 to $71.37 and from $49.10 to $55.65). Again, it is an
empirical question how SEM profits are affected by improvements in ad quality.
where:
CPC0
With Eq. (4), we can further decompose the total price effect
(PE) into direct and indirect price effects, DPE and IPE:
0
Direct Price Effect: DPE CPC 1 CPC 0 Clicks0 ;
effects [Eqs. (4) and (5)] equals the interaction effect (IE). For
comparable approaches in different contexts, see van Heerde
and Bijmolt (2005); Wiesel, Skiera, and Villanueva (2008).
Interaction Ef f ect: IE CPC 1 CPC 0 Clicks1 Clicks0
SEM Costs PE Q E:
In line with Eq. (3), we measure the return on quality improvements by calculating the difference in profit after SEM
costs per keyword as follows:
Prof it af ter SEM Costs
PCClicks1 Clicks0 SEM Costs;
4a
0
Indirect Price Effect: IPE CPC 1 CPC 1 Clicks0 ;
PEDPE;
145
4b
where CPC1' is the cost per click after the QS change if the rank
does not change [Column (5b)]. Similarly, we calculate the direct and indirect quantity effects, DQE and IQE, according to
Eqs. (5a) and (5b):
Direct Quantity Effect:
DQ E
Clicks1 Clicks0 CPC 0 and
5a
Indirect
Quality Effect:
IQ E
0
Clicks1 Clicks1 CPC 0 Q EDQ E;
5b
where Clicks1' is the clicks after the QS change if the rank does
not change [Column (6b)]. The difference between the SEM Costs in Eq. (3) and the sum of the total price and quantity
146
Fig. 2. Framework for the return on quality improvements in search engine marketing (SEM).
Empirical Examination
Purpose
This empirical study aims to analyze the consequences of
improvements in ad quality on prices per click, the number
of clicks, costs for SEM, and profits. Using data pertaining
to two real-world SEM campaigns that consider the results
of 4,354 changes of ad quality across 162 days, we first estimate the impact of changes in ad quality on rank, prices per
click, number of clicks, costs for SEM, and profits. We simultaneously model the search engine's keyword rank-allocating
and pricing behavior and consumers' click behaviors. The
obtained estimation results enable us to run counterfactual analyses on all QS changes in our data and thereby answer the
following research questions:
How great is the effect of a quality improvement (decline)
on prices per click? In how many cases does a quality
Table 2
Decomposition of the return on quality improvements for Advertiser B in the
numerical example.
Situations
A1
A2
$3.21
$3.21
$.00
$.00
$.00
$.00
$.00
$3.21
$3.21
$3.21
$.00
$.52
$.52
$.00
$.07
$2.76
$17.50
$7.50
$25.00
$.00
$.00
$.00
$.00
$17.50
$17.50
$7.50
$25.00
$3.12
$.52
$2.60
$2.33
$22.95
$3.21
$4.77
$17.50
$10.95
B1
B2
travel advertiser is a global cruise line brand that provides excursions to more than 50 countries and allows customers to
book cruises online; the industrial goods advertiser is a leading
manufacturer of industrial equipment that operates globally but
does not sell its goods online. In the former case, conversions
correspond to actual sales online; in the latter case, they are
contacts, such as requests for quotes or opportunities for sales
calls.
The data pertain to each given keyword on each given day,
between 13 January 2009 and 23 June 2009 (162 days total).
Because the prices per click related to a keyword may differ
across matching types, 2 we control for these differences by
treating keywords associated with the different matching
types separately. Our final data set includes 97,781 observations of 5,230 unique keywords. In Table 3, we report summary
statistics of our data set for each advertiser, including the number of searches, the number of clicks, the number of conversions, the cost per click, the rank, and the QS (from 1 to 10).
The average number of searches per keyword during the
study phase is 375.21 for travel, of which 37.89 lead to a
click (CTR = 10.10%) and .80 lead to a purchase (conversion
rate = 2.11%). The average number of searches per keyword
is much higher for industrial goods (3,648.92), but only
121.06 of those lead to a click (CTR = 3.32%) and .42 to a
conversion (conversion rate = .35%). The average CPC for a
given keyword is .45 in the travel industry and .39 for industrial goods. The average rank of these keywords is 2.60 for
travel and 1.46 for industrial goods. Finally, we find a high
average QS of 9.13 in the travel campaign and an average
QS of 7.78 in the industrial goods campaign.
Overall, we observe 4,354 QS changesthat is, differences
across two consecutive daysfrom January to June. For each keyword, the mean number of QS changes during the observation period is approximately 1. Investigating the QS changes more
closely, we find that out of 90 possible
types
of changes (e.g.,
10
1 2, 1 3, 2 1, 2 3; in total,
2 90, only 28
2
3
(31%) actually occur during the study phase. As we illustrate in
Fig. 3, approximately 40% of the 4,354 QS changes in our data
set are associated with an increase from either 8 or 9 to 10. Furthermore, the 3,038 positive QS changes are more than twice as frequent as the 1,316 negative changes.
Finally, the (confidential) profit contribution per click is
much higher for the industrial goods campaign than for the
travel campaign. Combined with a relatively high cost per
click, which often is higher than the corresponding profit contribution per click, many keywords in the travel campaign are
unprofitable. Whereas the share of unprofitable keywords
equals 92.47% for the travel advertiser, the industrial goods
147
advertiser only has 28.58% unprofitable keywords in its campaign. But the 7.53% profitable keywords in the travel campaign account for 19.08% of all searches, 45.53% of all
clicks, and even 73.90% of all conversions in the campaign
(Table 4). Whereas the whole campaign generates a loss of
15,743.03, these keywords generate only 21.02% of the
costs for SEM and a profit after SEM costs of 1,975.21.
This campaign therefore reflects a situation, in which less
than 10% of the keywords generate over two thirds of the conversions. In contrast, the industrial goods campaign is much
more balanced because 71.42% profitable keywords account
for 64.35% of all searches, 81.63% of all clicks, 73.75% of
all conversions, and 50.31% of the costs for SEM. While all
profitable keywords generate a profit after SEM costs of
80,016.84, the overall profit after SEM costs equals
59,405.53 for all keywords. Because these campaigns are
managed by the same agency, the two campaigns therefore reflect different conditions encountered in real-world SEM
campaigns.
Model
Following Ghose and Yang (2009), we simultaneously
model the search engine's keyword rank-allocating and pricing
behavior and consumers' click behaviors, but we focus on the
search engine's pricing decision because we are interested in
the direct and indirect effects of ad quality on prices per click.
Similar to Ghose and Yang (2009), we treat the advertiser's
bidding decision as exogenously determined because it is influenced by the advertiser's past performance with the same keyword and its campaign and not its present performance (i.e., its
present ranking, price per click, clickthrough and conversion
rate). The same applies to ad quality (i.e., QS value), which
also depends on the advertiser's past performance as opposed
to its present performance and is thus modeled as exogenously
determined.
First, we model the search engine's decision to assign ranks
for a paid keyword ad. During the auction, search engines decide on the keyword rank by taking into account both the current bid and the QS. We use a time trend to control for
changes in the extent of competition in the auction bidding process over time and unobserved industry dynamics. As Ghose
and Yang (2009) note, heterogeneity from various sources is
present when modeling SEM data. We therefore capture unobserved heterogeneity across keywords with a fixed effect on the
intercept and model the rank, using a log-linear form that depends on the two covariates, Bidit and QSit, and the time
trend, Timeit (Ghose and Yang 2009):
lnRankit i 1 Bidit 2 Q Sit 3 Timeit it ;
148
Table 3
Summary statistics.
Travel (N = 29,339)
Mean
10th
percentile
90th
percentile
Mean
10th
percentile
90th
percentile
375.21
1.00
405.00
3,648.92
2.00
3,840
37.89
1.00
50.00
121.06
1.00
217.00
.80
.00
.00
.42
.00
1.00
.45
.17
.80
.39
.06
.82
2.60
9.13
.98
1.00
8.00
.00
4.67
10.00
2.00
1.46
7.78
1.20
1.00
7.00
.00
2.32
10.00
3.00
1000
927
870
900
800
700
600
488
500
439
410
364
400
300
200
131
100
51
2
7 11 7
3 14
153
49
4
130
123
115
22
0
Notes: Quality Score changes from x to y (x y).
Fig. 3. Distribution of quality score changes.
15
10
Share of profitable
keywords
In total searches
In total clicks
In total conversions
In total SEM costs
Profits after SEM costs
for all keywords
Profits after SEM costs for
profitable keywords
Travel
(N = 29,339)
Industrial Goods
(N = 68,442)
7.53%
71.42%
19.08%
45.53%
73.90%
21.02%
15,743.03
64.35%
81.63%
73.75%
50.31%
+59,405.53
+1,975.21
+80,016.84
Notes: Number of keywords: 5,230 (travel: 2,655, industrial goods: 2,575). SEM:
Search Engine Marketing.
149
negative direct price effect; the higher the QS, the lower is the
price that the advertiser pays per click. This finding is therefore
in line with our proposed framework for the return on quality
improvements (see Fig. 2). In contrast with industrial goods,
the prices per click in the travel industry clearly have increased
over time. The main difference between these industries is their
sales target; the latter is a business-to-business (B2B) industry,
whereas the former involves business-to-consumer (B2C) interactions. The decreasing keyword prices per click in a B2B context might result from the worldwide economic crisis, which
has provoked reduced marketing budgets in an industry in
which demand for costly industrial goods has deteriorated
dramatically.
Finally, we find that rank has a statistically significant and
negative relationship with the number of clicks (indirect quantity effect), which confirms that better ranks (resulting from
higher QS) are generally associated with more clicks. This finding is again in line with our proposed framework (see Fig. 2).
We find that the QS has a significant and positive relationship
with the number of clicks in the travel industry (positive direct
quantity effect). However, this association is not true for industrial goods, for which the number of clicks is not affected by
higher ad quality. The reason might have to do with the audience; a procurement manager, searching for industrial goods
on a search engine, might not be as heavily influenced by ad
quality but instead rely on brand recognition. We also find
that the number of clicks has increased over time for industrial
goods but not for travel, which suggests that competition might
have increased in the travel industry. For our data set from January to June 2009, this result seems plausible because, according to Google Insights for Search, cruise line searches have
fallen from their peak in JuneJuly 2009.
Counterfactual Analysis
Finally, we conduct a counterfactual analysis to derive insights into the sign and magnitude of the effects of ad quality
on prices per click, quantity, SEM costs, and profit after SEM
costs. All else being equal, we calculate ranks, prices per
Table 5
Estimation results by industry.
Travel
Industrial goods
ln(Rankit)
ln(CPCit)
ln(Clicksit)
ln(Rankit)
ln(CPCit)
ln(Clicksit)
./.
./.
./.
./.
R2
F-value
Number of observations
Number of keywords
65.61%
334
28,558
1,874
.0482***
(.0069)
.0008***
(.0001)
.2851***
(.0140)
65.80%
168
28,558
1,874
.0224***
(.0053)
.0003***
(.0001)
1.1233***
(.0605)
59.50%
157
67,956
2,089
n.s.
Rankit
.0427***
(.0049)
.0002**
(.0001)
.2992***
(.0100)
71.82%
311
28,558
1,874
.3583***
(.0131)
.0070***
(.0013)
n.s.
./.
Timeit
1.2937***
(.0422)
.0300***
(.0044)
n.s.
Bidit
QSit
./.
84.17%
261
67,956
2,089
*** p b .01, ** p b .05, * p b .1, n.s. not significant. Standard errors are in parentheses. QS: Quality Score, CPC: Cost per click.
.0005***
(.0001)
.4148***
(.0504)
68.40%
61
67,956
2,089
150
Table 6
Decomposition of the returns on quality improvements and declines by industry.
Travel (N = 1,827) [N = 205]
Quality Improvement
(N = 1,435) [N = 147]
Quality Improvement
(N = 1,603) [N = 1,313]
in a
in a
in a
in a
Negative
Effect b
Negative
Effect b
Negative
Effect b
Negative
Effect b
499.30
[ 33.84]
1,219.30
[ 57.86]
720.00
[24.02]
2,251.71
1378
[147]
1435
[147]
0
[0]
0
224.57
[6.23]
957.70
[10.34]
733.13
[ 4.11]
1,667.72
27
[0]
0
[0]
392
[58]
392
289.63
[218.75]
679.23
[424.14]
389.60
[205.38]
148.01
1513
[1283]
1603
[1313]
0
[0]
0
116.83
[87.10]
310.67
[163.80]
193.84
[76.70]
69.96
59
[13]
0
[0]
924
[738]
924
[93.81]
1,467.30
[0]
0
[ 14.72]
1,030.95
[58]
392
[78.04]
.00
[0]
./.
[27.49]
.00
[738]
./.
[68.54]
784.41
[0]
0
[ 11.14]
636.77
[58]
392
[.00]
148.01
[./.]
0
[.00]
69.96
[./.]
924
[25.27]
46.91
[ 2.40]
1,705.50
[57.57]
809.00
(95.34%)
[59.16]
[(+486.57%)]
[0]
1378
[147]
0
[0]
1035
[ 3.57]
16.06
[.38]
1459.21
[ 8.87]
1,050.20
(+206.18%)
[ 10.98]
[( 155.55%)]
[58]
365
[58]
392
[58]
124
[78.04]
.97
[.82]
142.59
[141.53]
360.06
(+42.62%)
[328.14]
[(+ 30.62%)]
[0]
1513
[1283]
1441
[1251]
96
[27.49]
.43
[.41]
46.44
[59.20]
129.30
( 23.78%)
[ 120.42]
[( 18.24%)]
[738]
865
[725]
98
[22]
861
[0]
[58]
[20]
[729]
Notes: Results for profitable keywords are given in square brackets. Percentage increase in profits compared to situation before quality score change is given in parentheses. SEM: Search Engine Marketing.
a
Sum of effects for quality improvements and quality declines separately. For example, for all 1,435 quality improvements in the travel industry, the direct price
effect leads to a drop in SEM costs by 1,219.30.
b
Number of negative effects (i.e., reduction in price per click, quantity, SEM costs, or prot after SEM costs) out of all quality improvements and declines per
campaign. For example, prices per click decrease for 1,378 of 1,435 quality improvements in the travel industry. At the same time, SEM costs decrease in 0 of
1,435 cases and prots decrease in 1,035 of 1,435 cases.
151
Q S0
;
Q S1
11
where:
Bid1:
Bid0:
QS0:
QS1:
152
Table 7
Return on quality improvements and declines by industry with quality adjusted bids.
Travel (N = 205)
SEM costs
Profit after
SEM costs
Quality Improvement
(N = 147)
Quality Improvement
(N = 1,313)
in a
Negative
Effect b
in a
Negative
Effect b
in a
Negative
Effect b
in a
Negative
Effect b
5.55
31
.54
34
1,117.08
1,313
526.76
78.91
(+648.93%)
14.18
( 200.85%)
58
784.23
(+73.18%)
14
374.72
( 56.76%)
732
Acknowledgments
The authors thank Oliver Hinz and Jochen Reiner for their
valuable comments on an earlier draft of the article. They also
gratefully acknowledge financial support from the E-Finance
Lab at Goethe-University Frankfurt.
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