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Adwords, Coffee And Cigarettes

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When cigarette advertising was legal, cigarette manufacturers would plan well in advance how much they would spend on marketing their products. Company A’s advertising effectiveness completely depended on the advertising of Company B’s; if they both had a 50:50 share of the market and didn’t do any advertising the market share split would remain consistent; however if they both launched advertising campaigns, they would essentially cancel each other out and the market share would remain at 50:50, the advertising becomes little more than an additional expense to both companies. It was ultimately a game, with a number of outcomes, one of which leads to a win-win scenario for both firms. This basic concept of Game Theory still exists in advertising today, but within a far more volatile and fast moving environment.

Keyword bidding

With PPC, each advertiser through various methods calculates the maximum worth of a keyword. Without bringing quality score into the equation, each advertiser will pay not what they have valued their keyword at, but what their competitors have valued the keyword at, since the auction system works by making you pay £0.01 more than the next highest bidding competitor. As such, if every player in the auction agreed to cap their bids at a lower rate, all the players would be better off.

If advertisers did form an alliance to fix positions at lower bids, the possibility still exists that an advertiser could defy the rules of the agreement at any hour of any day and immediately win the game. Historically in any advertising space short term gain will often override; it’s just a matter of time. Coordinating and monitoring these kind of “agreed” relationships is a cost itself. But it is possible. You need technology and trust to save time monitoring, along with a small number of competitors in a niche which is not expecting any newcomers. Agree to set bids low and increase your profit margins.

Yet Google is continually developing its algorithm, which is making collusion harder to maintain. Google have data on how much previous advertisers have been willing to pay for a premium spot, and have techniques to encourage this. I’d be shocked if they didn’t already have a full-time team set aside working on exactly how to prevent capped bid agreements.

Dropping your costs

Yet there are other routes to artificially dropping your costs from what the other players in your industry are paying. In the same way cigarette companies welcomed and endorsed laws that banned adverting of cigarettes, certain Adwords advertisers’ endorsed trademarks, terms that couldn’t be used in adtext unless you were licensed to have them. Back in the days where anyone could bid on ‘iPhone’ and have the same word in their ad, the space was awash with ads for the product. But when it got trademarked, not having the word ‘iPhone’ in your adtext meant no clicks, poor quality scores, and such a huge drop in opportunity that many advertisers chose to drop out.


Google have since relaxed their trademark policies, and now we see competition back up on these previously heavily trademarked terms.

So if collusion is set up to fail and you don’t want to pay market rates for your ad spend, what do you need to do?

On RTB (real-time bidding) platforms you will only pay what your competitors are willing to pay but in new spaces, where your competitors aren’t yet appearing, you can undercut marketing spend. So look to mobile. Look to the new search engine products. Look at new ways of targeting. Look at new platforms, new markets, and new products. Drink your coffee, wake up earlier and don’t be a slow mover. Take all the tricks you have learnt, adapt them to new areas and new spaces, and don’t be afraid to evolve your business model around these new developments. Ridiculously low marketing costs are out there; you just have to find them.

  • http://twitter.com/freeg131 Philip Gamble

    I don’t see how a capped bid agreement could work – with Adwords there is virtually no cost to entry, a non-colluding site or affiliate just could easily set up and outbid the fixing sites.