Digital Reach
By Digital Reach | SEM | April 17, 2017

Superior Structure: The Programmatic Auction

Getting Started with Programmatic Auction Structure

Hello advertisers! You may notice I am new to Digital Reach, and you’re likewise curious what contribution I could make alongside such exceptionally useful pieces like Nick’s video series or Laurie’s feature guides. In lieu of holding up a magnifying glass to a particular niche of sponsored SEM, I’ve decided to take a step back from the technology and instead focus on what I feel is the single most important contributor to the success of any SEM effort: structure. Today, we’ll talk about structure in the SEM Programmatic Auction.

Then, over the next several entries in this series, I’ll guide you in a survey of account structure theory and best practices, aiming to answer all of these questions and more:

  • What is the optimal account structure for low costs-per-click and costs-per-conversion?
  • What is the relationship between the amount of material (ads, keywords, extensions, etc.) and bids when it comes to optimizing for low CPA?
  • What is the impact of account structure on automated bid strategies like Enhanced CPC?
  • How can superior account structure give you an unfair competitive advantage over other advertisers?

And ultimately, this series – which I’m calling Superior Structure – is going to reveal an utterly game-changing secret about Google AdWords that will transform how you think about bids. More on this later!

Let’s jump right in.


Before we contend with campaigns and ad groups, it’s useful to think about the name of the game we’re playing when we “do SEM” of any kind. And what SEM boils down to is trying to win an auction.

In the case of Google AdWords and its compatibles, it’s a very special type of auction called a multi-item multi-slot non-truthful Bayesian Generalized Second-Price Auction. If this makes sense to you, I highly recommend you stop reading immediately and instead pick up “Optimal Bidding in Multi-Item Multi-Slot Sponsored Search Auctions” by Abhishek and Hosanagar. Warning: It’s a bit dry.

 

For the other 99.99% of us, we’re left asking: Why a programmatic auction? And why has Google chosen this particular auction mechanism to entrust its advertising? Best estimates have ads comprising at least 71% of Google’s revenue, so clearly there must be something here.

The answer is an auction allows Google to let free market forces maximize its revenue while also incentivizing advertisers to serve search users with the best quality content – the most congruent answer to the searcher’s question. A fixed number of advertisers – currently about eight per results page – are welcome to the table to place a bid on the privilege to serve a custom message to a search user. Accordingly, there are eight available seats for these messages to appear.

Source: Delegator

But are these eight seats all worth equal value? In AdWords, the value of these seats is correlated with the likelihood of any message being clicked. We know from robust experience that ads appearing in the highest-up placements on results pages win more clicks than those appearing lower.

And the explanation for this pattern? Sheer psychology and probability. Humans don’t like to read any more than they have to, especially if it’s not the apparent information they want! If the top-ranking ad seems to promise the answer they’re looking for, they’ll stop reading the ads and results below, and simply click through to the advertiser’s site.

It’s critical to note that the AdWords auction is here tempered by another fundamental structure. Without this structure, any advertiser could simply come along and swipe the top spot without having a competitive answer for the searcher! That’s not “Googley” at all – but once upon a time it was. Here’s an excellent excerpt from Eric Schmidt’s wonderful How Google Works, where Schmidt observes Larry Page’s reaction to misleading ads on the early AdWords platform:

Larry was horrified that the AdWords engine, which figured out which ads worked best with which queries, was occasionally subjecting our users to such useless messages.

At that point, Eric still thought Google was a fairly normal start-up. But what happened over the next seventy-two hours completely shifted that perception. In a normal company, the CEO, seeing a bad product, would call the person in charge of the product. There would be a meeting or two or three to discuss the problem, review potential solutions, and decide on a course of action. A plan would come together to implement the solution. Then, after a fair amount of quality assurance testing, the solution would launch. In a normal company, this would take several weeks. This isn’t what Larry did.

Instead, he printed out the pages containing the results he didn’t like, highlighted the offending ads, posted them on a bulletin board on the wall of the kitchen by the pool table, and wrote THESE ADS SUCK in big letters across the top. Then he went home.

The following Monday at 5:05 am, Google’s first generation of engineers invented the Quality Score (covered in depth here) as a method of imposing a financial incentive, directly on advertisers’ bids, to be relevant to the user.

How Google Works contains an early meditation on AdWords structure.

So altogether, we have bids and we have Quality scores, working towards or against each other to determine an advertiser’s ultimate seat at the auction. And fortunately, this configuration minimizes the price of anarchy inherent to any auction. Google may be inclined to maximize their own revenue, but as the adage goes, they’re definitely not evil. Ultimately, the AdWords auction mathematically prevents advertisers from drastically over-spending by bidding beyond the free market value of their seat in the auction.

Challenge Question:

We’ve established that the value of each seat in the AdWords auction comes from sheer probability. What would happen if tomorrow every advertiser suddenly decided the bottom placement is the most valuable? What can advertisers do, if anything, to take advantage of this? What could Google do to maximize its own revenues? Is there anything preventing “Anti-AdWords” from happening?

I’ll reveal the answers in my next post in this series!

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