Adwords is like poker: If you can’t see the sucker, you’re it

When it comes to effective advertising methods Google Adwords rules the roost. You get to display your advert at exactly the right time to exactly the right prospect – the moment your potential customer is looking for it. This is astonishingly powerful and will generate over $100 billion in revenue for Google in 2018. However, all that revenue comes at the expense of the advertiser.  Most categories are now so competitive, making the cost of advertising very high, and when the costs are so high, advertisers need to live and breathe the figures in order to turn a profit.

In a competitive space Google will eventually take all the profit. Imagine:

  • There are four identical competitors
  • Each sell a digital book for $10 which they have written with no associated cost of sales
  • 10 clicks from Google Adwords are required to generate a sale
  • There are only 3 advertising slots available from Google.

How much will each advertiser bid per click?

Game theory tells us they will bid up to $0.99 cents. Any further and they won’t turn a profit. Any less and the other three competitors will out compete for the three slots and revenue goes to zero. So in for $10 sales, Google will take $9.96 – all but $0.04. In effect, Google takes all the money!

But it’s much worse than that. In the above example we limited the number of competitors to 4 and assumed they were all logical actors with complete knowledge and skills. Unfortunately this is rarely the case.

Most competitive markets have a few ill-informed actors. These actors will frequently outbid all the competition in order to maximise their traffic and resulting revenue. Imagine the above scenario with a couple of these ill-informed actors. Each bid $1.05 a click, resulting in Google taking $10.50 for each $10 sale. Google takes more than all the money!

But won’t the ill-informed actor eventually exhaust their budget, realise the error of their ways and either amend their bidding strategy or exit the market? Well yes, but there is an ample supply of ill-information actors ready to take their place.

So if you’re newish to advertising on Google, take a good look around at what your competitors are doing and if you can’t spot the one who is over bidding then chances are it’s you.