There are two pieces of conventional wisdom surrounding Google’s
Enhanced Campaigns that seem to get tossed around a lot without much
thought or examination.
The first is that this new campaign model will make it easier for
small advertisers to get into the mobile advertising game. The second
related piece is that Enhanced Campaigns will likely lead to higher
mobile CPCs and that this is one of Google’s primary motivations for
changing its model.
I have personally been guilty of echoing both of these sentiments to
varying degrees — but as we get closer to the mandatory transition in
July, the conventional wisdom seems less convincing. Maybe it is the
contrarian in me, but I think there is a decent argument to be made that
the move to Enhanced Campaigns will lead to lower mobile CPCs in the
near term, but higher overall CPCs.
Will Enhanced Campaigns Really Bring In More Mobile Advertisers?
At RKG, we manage large-scale, enterprise-level paid search programs,
so we don’t have much direct insight into how the typical mom and pop
organization sets up their AdWords program. But, it’s important to note
that the default setting for a legacy AdWords campaign is to target all
devices, and Google even includes a recommendation that new advertisers
keep that setting:
So, it has required some effort to opt out of mobile entirely, and a
certain amount of knowledge and motivation to do so. In his article a
few months back, Larry Kim noted that only 1 in 25 SMBs
were creating separate, mobile-optimized campaigns. That sounds
reasonable, but it is not the same as saying only 1 in 25 SMBs are
advertising on mobile devices.
The bottom line is that Enhanced Campaigns may simplify bidding
segmentation for less sophisticated advertisers, but it doesn’t make it
any easier to turn on mobile. To the extent that SMBs have been
sophisticated enough to know that smartphone traffic should be
segmented, but have been unwilling or unable to do so and simply turned
it off, this change will lead to greater mobile adoption.
It’s unclear, though — at least to me — that this comprises a large
enough group to have an appreciable impact on the competitive landscape
for the larger players in the industry.
Mobile CPCs Are Already Higher Than They Should Be
For all the consternation Google stock watchers express over the size
of the smartphone to desktop CPC gap and why it isn’t closing faster,
the reality is that mobile CPCs are likely higher than they ought to be
for most advertisers.
Most industry reports show smartphone CPCs running somewhere around
50-60% of desktop levels, while tablet CPCs run at 90%-100% of desktop
levels. Performance breakdowns on the conversion side are scarcer, but
over the last several years, RKG has consistently found average revenue
per click (RPC) for smartphones running far below the RPCs of computers
and tablets.
In the first quarter of 2013, smartphone RPCs were just 23%
of those for computers. If those results are fairly representative of
the industry, it suggests that advertisers are placing a pretty hefty
premium on smartphone traffic.
While there are a number of rational reasons why advertisers would be
willing to accept a lower directly measurable return on ad spend (ROAS)
for smartphones — cross-device purchases, offline spillover, and other
tracking difficulties, to name a few — do all of these elements really
add up to a level that justifies an online ROAS that is roughly a third
of that for desktops and tablets?
For many, if not most, the answer is probably no. With mobile
generating an ever-growing share of advertisers’ traffic and Enhanced
Campaigns forcing all Google advertisers to reassess their mobile
strategy, we could see increased scrutiny lead to tighter efficiency
targets that ultimately push down smartphone CPCs. How might that play
out?
How Lower Smartphone CPCs Could Benefit Advertisers & Google
Let’s consider a fairly simple but hopefully realistic scenario. An
advertiser’s goal for their AdWords program is to achieve a measurable
ROAS of $5. As long as they can hit that efficiency target, they will
keep investing more ad dollars into the program.
With smartphone CPCs at 60% of those for computers and tablets, the
advertiser sees smartphones generate 15% of their traffic. Their revenue
per click for smartphones is just 25% of that for desktops and tablets,
though. Throwing in some specific values, we might get campaign
performance stats that look like this:
Overall, the advertiser hits its efficiency target and generates over
$3.5K in revenue. But by the definition of this scenario, they are more
efficient on the desktop and tablet segment than they need to be and
not hitting their target for the smartphone segment.
Our hypothetical advertiser is an online pure-play and believes that
the extrinsic, or at least difficult to measure, revenue impacts from
smartphones are roughly equal to those for other devices and decides
that both segments must hit the same efficiency target. They bid up the
desktop and tablet traffic, and pull back significantly on smartphone
bids as shown below.
In total, click volume falls a bit, but the advertiser is able to
generate more revenue, spends more and pays a higher overall
cost-per-click. Seemingly, this would be a win-win for the advertiser
and Google.
Okay, in the real world, there are plenty of complicating factors
that make it difficult to extrapolate the scenario above to the larger
AdWords ecosystem. Not all advertisers share the same goals and metrics
for success, or even operate on a rational level. Those differences may
also be spread inconsistently across advertisers.
In addition, the changes in traffic levels above are based off of
Google’s own Bid Simulator data; but, were all advertisers to make a
similar move at the same time, we wouldn’t expect the same result. There
are a finite number of desktop and tablet searches and ad inventory;
and, if advertisers bid more, that doesn’t change.
We must also consider the effect Google has directly had on
influencing mobile click costs and how that might change under the
Enhanced Campaigns model.
Smart Pricing
If you Google (or Bing) the phrase “AdWords Mobile Smart Pricing,”
you’ll have trouble finding authoritative and accurate information on
the subject. There was, however, a point in time when Google’s AdWords
help pages offered some detail on how they would adjust CPCs based on
device for campaigns targeting all devices.
When I did comparison of mobile and desktop CPCs
for RKG a couple of years ago, I found that, all else being equal,
mobile CPCs were 41% lower than desktop — not dissimilar to most of the
figures you hear today. At the time, I offered speculation on other
factors that could have led to the observed results, but I now believe
that Google’s smart pricing was far and away the primary driver of that
differential.
Why does that matter now? There are reports out there noting that
smart pricing will be going away with Enhanced Campaigns, and this could
be a big wildcard in how the landscape evolves over the next few
months.
Large and sophisticated advertisers should adjust quickly to that new
reality, but it will likely take much longer for others to get a handle
on what is happening with their AdWords program. During that period,
it’s hard not to see Enhanced Campaigns as levying a form of tax on
those that aren’t able to accurately assess the value of their traffic
from each of the two broad device classes that exist under the new
model.
We may never get a precise read on this, but the Enhanced Campaigns
transition seems likely to drive mobile CPCs up for some, but down for
others.
Google’s Real Incentive For Mobile Search Ads
Rightfully, Google cares more about the revenue they generate than
what their average CPC is overall or for smartphones, specifically. If
mobile clicks are overpriced, it hurts advertiser efficiency and should
lead them to decrease their total investment in search ads. The notion
that Google would engineer Enhanced Campaigns the way it did in order to
drive up mobile CPCs, without generating additional value to
advertisers, doesn’t make much sense in the long term.
Google’s real incentive when it comes to mobile is to help
advertisers find and accurately quantify any hidden value it presently
holds. Google is uniquely positioned to do this, given the myriad ways
it has to identify and track users.
At Google I/O a couple of weeks ago, we heard more about how cross-device tracking will work in Google Analytics. I’d expect to see more of this, and it’s less a question of what Google can do in this area than what they should or will do as they try to strike a balance between addressing the concerns of its users and the wishes of its advertisers.
