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Yesterday, The New York Times ran an article featuring the "humans behind the Google money machine" (login now required:( ) It's worth creating a login to read.
The article shows the marketing world's most powerful 29-year-old, Nicholas Fox, who oversees Google's "Ads Quality Group". He and his team dictate the Quality Score algorithym's application to advertisers, and are responsible for monitoring and reporting the effects of their changes to Google's bottom line.
A couple of interesting insights in this article:
"Traffic was growing rapidly, as was the average price that advertisers were paying for clicks. But Mr. Fox and others realized that measuring the average cost-per-click was not good enough. Users might be clicking on more high-priced ads and fewer lower-priced ads. That would cause the average cost-per-click to rise, but it would say little about the health of the overall system.
So Mr. Varian and Diane Tang, principal engineer in the ads quality group, helped devise what they call a basket of keywords. Much like the consumer price index, a basket of goods and services that economists use to track inflation, the measure is made up of a broad sample of keywords and is weighted to make it statistically accurate. This internal benchmark helps Google get a clearer picture of its performance."
This little snippet explains a lot: The "Keyword Basket" is used by Google to determine the overall price/performance ratio of a "broad sampling of keywords". Many advertisers have long suspected that Google knows exactly what each keyword is statistically worth to them. But "the value" of a keyword is not simply what they think the highest-ranked advertiser will be willing to pay for that keyword, it's more like they know what the average number of bidders will be, combined with the historical bid levels, mixed with average bidder daily budgets, and overall search volume.
What you end up with out of a formula like that is a "minimum market price" for every keyword ever searched or bid on on the system.
This could mean (again what has long been speculated on), that Google already has a minimum bid pre-set for a search term you're adding to your campaign. It explains why when you have a "Great" QS for the term "widget" if you also enter the plural "widgets" you see an "OK". The reason they're different with the exact same ad text, the same adgroup, and the same landing page, is because Google's 'keyword basket' shows that "widgets" has been assessed a higher "minimum market price" by Adwords regardless of who is bidding on it. You can spend as many hours as you like trying to optimize for that keyword, but given the variables in the keyword basket, you'll never get it down to "Great". Interestingly, Google has also publically said that they view some keywords as inherently "low quality" and thus automatically have a pre-set high minimum bid.
Of course, it makes sense when you think of Google as a having billions of 'pageviews' or SERPs, and like any high-volume publisher site with billions of pageviews, they know exactly what each of those pages and originating keyword inventories are worth. And given the fact that it's their 'pageview', they'll set the minimum system-wide cost-to-play and let the free market do the rest. It may not be as obvious as a $12 across the board minimum bid for the keyword "mortgage" but when you think of those few cents here and there across billions of search term keyword inventory, it's ingenious.
One focus of the New York Times article was Google's response to a recession, and when you see the beauty of their long-tail strategy vs. a straight cash grab on the highest volume terms, you see why they're almost certainly "recession-resistant" like their Chief Economist Hal Varian says. You really have to marvel at the brains that put this stuff together….
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