The Science of Managing Search Ads

The Science of Managing Search Ads
By MIGUEL HELFT
Copyright by The New York Times
Published: December 21, 2009
http://www.nytimes.com/2009/12/22/technology/internet/22search.html?th&emc=th


MOUNTAIN VIEW, Calif. — Cyber Monday had gone swimmingly for Tiny Prints.

A designer at Tiny Prints last week. Gamesmanship and data analysis are critical to successful search advertising.

Despite the economic downturn, customers streamed into the Tiny Prints online store on the Monday after Thanksgiving, called Cyber Monday because it is one of the busiest days of the year for Web retailers. They snapped up the company’s custom holiday cards at roughly twice the rate of a year ago.

But in the following days, Ed Han, the chief executive, and his team made a risky bet in search of higher profits. Hoping that traffic and sales would stay up, they pulled back on the Google search ads that had helped drive visitors to Tiny Prints.

The gamble backfired. Just as Tiny Prints pulled back, competitors appeared to spend more aggressively to display their ads when people typed “holiday cards” or “photo cards” into Google. By the middle of the week, sales growth began to taper off and a bright holiday season suddenly appeared a bit less rosy.

“We knew we had made a bad decision,” Mr. Han said. Tiny Prints reversed course, but it took the company, which is privately held, more than a day to recover — a critical amount of time during the heavy shopping season.

For most people, Google and other search engines are essential tools to navigate the Web. But the workings of the text ads, the blurbs that peddle goods and services on the search results pages, are largely hidden from Web users.

For more than one million businesses, Google’s search advertising system is like a hose inundating Web sites with traffic. Managing it effectively, though, is as much art as it is science. It requires a mix of analytics and gamesmanship, a combination of skills that has become vitally important in the Internet age.

“It is critical,” said Ellen Siminoff, the chairwoman of Efficient Frontier, which helps companies manage their search advertising campaigns. “You have to have data and be able to analyze it. It’s a bit like playing chess, but you are blind to what your competitors will do.”

Many industry insiders say search engine marketing, as the practice is known, is one of the most effective forms of advertising ever devised. In just a decade, it has grown into an $11 billion business in the United States. It accounts for the vast majority of Google’s $22 billion in annual global sales.

Google’s service, called AdWords, dominates so thoroughly that some advertisers have felt at the mercy of the company, and complained that they had little control over the complex advertising system. One company, TradeComet, filed an antitrust lawsuit accusing Google of artificially increasing its advertising rates.

But by and large, businesses find search advertising effective and continue to flock to it, albeit at a slower rate than in previous years. As growth has tapered off over the last year, Google has stepped up its outreach efforts to help midsize companies like Tiny Prints use its tools more effectively, hoping that will encourage those companies to spend more.

“It’s good for our business and it’s good for their business,” said Claire Johnson, vice president for online sales and operations at Google.

Like many other businesses, Tiny Prints also buys search ads on Yahoo and Microsoft’s search engine, Bing. While results are “very attractive,” the traffic coming from those sites is small compared to referrals from Google, Mr. Han said. As a result, Tiny Prints spends nearly 90 percent of its search marketing budget on Google, he said.

Mr. Han said that Tiny Prints, which specializes in high-end custom-designed greeting cards, had been working at perfecting its search advertising for the last two years. Its three-person team, veterans of Walmart.com and eBay, has become expert at poring over spreadsheets and sifting through the data about visitors and shoppers on the company’s Web site. During the holiday season, they monitor ads and traffic patterns hourly, and meet daily with Mr. Han and other executives to adjust budgets and strategies.

During one of the company’s daily budget meetings in mid-November, Anna Fieler, the vice president for marketing, said, “We are on a trajectory to overspend on search.” She then added, “But we are delivering on revenue.”

Search ads are bought from Google through an auction, and businesses pay Google only when someone clicks on their ad. An ad’s position on Google’s search results pages depends on Google’s secret formula derived from bid prices, the rate at which users previously clicked on the ad and a “quality score” determined by Google.

Since not all clicks turn into purchases, the trick for advertisers is to make sure that the amount they bid, multiplied by the average number of clicks needed to make a sale — the cost of acquiring a customer — does not exceed the profit derived from that sale.

But that can be easier said than done.

Early in the holiday season, for example, most people are window-shopping, so few clicks turn into sales. Tiny Prints is forced to pay more than $50 to acquire each customer, leaving little room for profits on an average order. Relying on spreadsheets of buying patterns from previous years, Tiny Prints search marketers make the case to Mr. Han that their cost of acquiring a customer is on track.

“We are seeing day by day that it is starting to dip,” said Isabelle Steiner, the director for search marketing said at the meeting in mid-November. “I’m projecting that by end of month, we’ll be spending $35.”

Based on those assurances, Mr. Han then gave the team the green light to increase spending on search ads. But Mr. Han brought up another point: competitors could disrupt the plans if they suddenly started bidding aggressively on the same keywords as Tiny Prints.

“What if Hallmark comes in on Saturday?” Mr. Han asked, referring to the Thanksgiving weekend. “Do we have a plan to react to what competitors might do?”

The plan, Ms. Steiner said, was to monitor the site around the clock.

A couple of weeks later, the vigilance paid off.

In a spot check squeezed between a birthday party and her own Christmas shopping, Ms. Fieler was welcomed by a screen of red alerts indicating that the Tiny Prints ads had fallen off the first page of Google search results for important keywords.

“We were then forced to make and implement a new plan to react to the competitive environment real-time,” Ms. Fieler said. “It was very tricky trying to balance not overpaying by participating in the frenzy with getting the impressions and clicks we needed to drive the business.”

By mid-December, with the bulk of the holiday shopping season behind them, Mr. Han and his team were looking haggard. In addition to late-night discussions of bidding strategies over instant messaging, they had pitched in to help wrap and ship orders.

Mr. Han would not disclose the company’s sales. But he said that by and large, the ad campaign on Google, which drove more than 20 percent of revenue, had been a success.

“Of the eight most important days of the year, we got seven exactly right,” Mr. Han said. “On one of the days, by our standards, we fell on our face.”