Creating an AdWords Ad

1. Online advertising Hal Varian April 6, 2009

2. Problems with advertising

3. Broadcast radio Killer app: ship-to-shore Broadcast: a nuisance� Could that bug become a feature? The Euphoria of 1922�like the Euphoria of 1999 What�s the business model for broadcast radio? Government provision (BBC)? Private contributions (public radio)? Hardware producers subsidize content (RCA)? Tax on vacuum tubes (Media tax) Advertising � the least favorite alternative

4. Advertising model First radio commercial Apartment rentals in NYC Challenge to advertising Could only survive in areas with dense population Need enough potential buyers to pay for content that people would want to listen to So only viable in big cities

5. AT&T to the rescue Sent radio signals over copper and rebroadcast nationwide Built national networks Didn�t have to make very much per person to cover cost of producing content National brand marketing TV took this model over when it arrived

6. CPMs � the problem Advertising is, in general, very low-effectiveness business Cost measured per thousand impressions (CPM)? Broadcast TV: $10 CPM for 30 second impr Superbowl 30 second spot: $25-40 CPM Around 1 cent per 30 sec impression; 2 cents for 1 minute; 20 cents for 10 minutes Conclusion: TV network is paid 20 cents an hour of content for your attention Too cheap. That�s why trend towards viewer pays for video content Trend towards cable TV, DVDs, satellite radio: pay per view, and consume what you want

7. Typical CPMs Outdoor: $1-5 CPM Cable TV: $5-8 CPM Radio: $8 CPM Online Display $5-30 CPM Contextual: $1-$5 CPM Search: $1 to $200 CPM Network/Local TV: $20 CPM Magazine: $10-30 CPM Newspaper: $30-35 CPM Direct Mail: $250 CPM

8. Online advertising Search ads (Google Adwords)? Related to search terms Not intrusive, yet highly relevant Contextual ads (Google AdSense)? Related to content on page Display ads (various)? Standardized ad shapes with images Normally not automatically related to content but may be related to audience

9. Pricing for online ads CPM = cost per 1000 impressions Typically used for display ads Common denominator for ranking CPC = cost per click Typically used for search + contextual Predict prob of click, rank by eCPM CPA = cost per action (or acquisition)? eCPA = effective cost per action Used for contextual, predict prob of conv, rank by eCPM

10. Search advertising Highly effective since it reaches people when they are interested in a topic Relevant, yet not obtrusive Has expanded rapidly in last few years Expectation of further growth�

11. Aligning incentives Google sells ad impressions (views)? Seller generally wants clicks and ultimately conversions (purchases)? Rank ads by how much advertisers are willing to bid for impressions: Bid/click x clicks/impr = bid/impr But may want too many impressions Answer: disable if eCTR is too low

12. Pricing personalized ads Highly differentiated ads: huge pricing problem Google used to use impression-based pricing Solution: use keyword auction-based system Difficulty: depends on competition Auctions with a lot of competition: prices get pushed to market value Auctions with little competition can be very valuable, since default cost per click is only ~5 cents

13. Measurability Huge advantage in measuring effectiveness Pay per click Conversion tracking Value of ranking system Ranks ads by bid x ad quality Show ads likely to get the most valuable clicks in the most prominent position E.g., �best ads get best exposure� Creates a virtuous circle: individuals want to click because results are relevant

14. Ads system from viewpoint of advertiser Choose your creative text Standardized size Various optimization tips available Choose your keywords Exact, broad, phrase, negative keyword Follow guidelines for content Implement conversion tracking if desired

15. 15 Creating an AdWords Ad

16. Setting up ad campaign, cont. Choose your maxCPC Value of a click = prob of sale * profit per sale Can estimate how many clicks you will get Discounter will set actual CPC to minimum amount necessary to retain position Set daily budget Let �er rip

17. Challenge to advertisers Keyword choice This is the most critical Market efficiencies: high CTR words have high prices What matters is the cost effectiveness: the ROI Avoid question marks, exclamation points; �free� is good, repeating product name is good Choose keywords carefully; can use SEOs E.g., plurals get more clicks and more conversions than singulars. �Diamonds� more valuable than �diamond� How much to bid Measure cost-per-acquisition and/or ROI

18. How to bid? Determine value per click Probability of purchase x profit margin Impression value, return visits, etc. Determine relationship between cost and clicks How much do you have to pay to get x clicks? Find profit maximizing point Find bid that gets you to this point Equivalently use incremental cost per click

19. Profit max bid Don't want to move up:

20. Example

21. How to set budget? Don't. If you can measure performance, why set budget? I will give you $2 for every $1 you give me How many times to you want to do that? Display advertising is different Can catch attention through different media Search is generally done on one engine Though can catch attention via other means

22. Advertiser optimization Choose good creatives, follow tips Determine your value per click Can use Google�s conversion tracking Or use your own tool Maximum bid = maximum value per click Shade down depending on competition Minimums Bid: ~5 cents CTR:~2%

23. Factors affecting revenue for search engine

24. Increasing revenue Increase CPC Create higher conversion prob for advertiser Capture more value by increasing competition Increasing coverage Get more keywords Match more broadly (affects CTR)? Increase depth Get more advertisers, more ads Increase CTR Show more relevant ads Show high quality ads in prominent positions

25. Technology Engine to match ads to queries Choose most relevant ads using various criteria (plurals, synonyms, etc.)? Returns up to 11 ads to show on a page Promotion policy: depends on CTR performance and CPC Auction engine Ranks ads by eCPM, records payment

26. 26 Engineering challenge: Predicting CTR Dizzying set of factors could affect clickthrough Country, time of day, targeted text vs query, � How does one automatically figure out which factor is more relevant? How to update model quickly in face of change How do you estimate CTR for not-yet-shown ads? Huge machine learning model for predicting clicks and other aspects of ad quality

27. 27 Statistics collection & reporting Advertisers want to know how they are doing: Serving is inherently distributed and global But advertiser view is inherently global Want data summarized, sliced and diced along many dimensions In real time Hundreds of millions of rows of data per day Need to have up to date budget information about hundreds of thousands of advertisers in real time while running many thousands of auctions per second

28. 28 So many advertisers, so little Oracle� We use MySQL� and we divide and conquer by partitioning customers onto separate database servers

29. Contextual Advertising �Content ads� Use keyword matching engine to pick ads related to content on page Matching algorithm tweaking to deal with multiple content on page Auction needs tweaking to deal with position Generally lower CTRs, lower conversion performance, adjustments made in payment Very simple to set up

30. 30 And how we serve the ads

31. 31 AdSense forContent Contextually-targeted ads Example: cheese.com What ads would you show? Buy some cheese Look for other kindsof cheese Recipes? Or diet?

32. 32 AdSense Challenges Need to know the context of the page? fetch the target URL Need to understand what it�s about? natural language processing Need to find the best matching ads? how do you even define �best match�? (a competitor�s ad would be bad!)? Do this all a gazillion times a minute�serving users on every continent�in over 20 languages�for millions and millions of users

33. 33 Display advertising Prime example: banner ads 1000s of advertisers 100s of big publishers Prices set by negotiation New kids on the block (mostly for remnant inventory)? Ad networks Managed Make arrangements with ad networks Ad exchanges Unmanaged Two sided market

34. Display formats Floating ad: An ad which moves across the user's screen or floats above the content. Expanding ad: An ad which changes size and which may alter the contents of the webpage. Polite ad: A method by which a large ad will be downloaded in smaller pieces to minimize the disruption of the content being viewed Wallpaper ad: An ad which changes the background of the page being viewed. Trick banner: A banner ad that looks like a dialog box with buttons. It simulates an error message or an alert. Pop-up: A new window which opens in front of the current one, displaying an advertisement, or entire webpage. Pop-under: Similar to a Pop-Up except that the window is loaded or sent behind the current window so that the user does not see it until they close one or more active windows. Video ad: similar to a banner ad, except that instead of a static or animated image, actual moving video clips are displayed. Map ad: text or graphics linked from, and appearing in or over, a location on an electronic map such as on Google Maps. Mobile ad: an SMS text or multi-media message sent to a cell phone.

35. Display ad pricing Generally on a CPM basis Nominally there is a rate card In practice there is negotiation with a variety of terms Ad exchanges and networks use auction like mechanism Number of players 100s of web sites 1000s of advertisers Serving is done by 3rd parties Publisher side Advertiser side Economies of scope: serve for your site, serve for others

36. Ad server functionality Uploading ads Managing ads according to differing business rules (based on contract)? Frequency capping Ad rotation and sequencing Collision avoidance Targeting ads to different users, or content Behavioral targeting Contextual targeting Tuning and optimization based on results. Reporting impressions, clicks and interaction metrics Reconciling ad side and pub side Prices for basic serving tend to be a few percent of ad value Action is in value added services and remnant ads

37. Behavioral targeting Audience Extension: Extending valuable inventory by labeling an audience in one environment and recognizing that audience elsewhere. Example: readers of financial site see ads for Mercedes on financial site and extended elsewhere Retargeting: Recognizing consumers who have already seen or expressed interest in a product or brand and showing targeted advertisements in different media or locations Search Retargeting: Showing search-relevant ads on a page visited immediately after a search execution Audience Amplification: Finding similar users to those you're already targeting E.g., Amazon collaborative filtering Surround Session: Enable a single advertiser to own ad space for a user's entire session Frequency Capping: Limiting the number of times a user views any one advertisement

38. Type of data Demographic: zip code, age, gender (ZAG)? Contextual Transactional Geographic Psychographic Affinity

39. Interest based advertising

40. Syndication network Can syndicate all types of ads Search AOL = both Ask Jeeves = ads only Yahoo (formerly) = search only MSN was served by Overture/Yahoo Negotiated revenue share with partners Can do this for all 3 types of ads

41. Reverse channel Use Web to measure effectiveness of local TV/radio/newspaper Look at URL queries Automobile companies Allows for much more precise measurement of effectiveness Cosmetics companies: search term research for product design Auto companies: use web queries to measure media/campaign effectiveness. Can get immediate feedback on test campaigns.

42. Wall Street and Madison Ave Finance: came of age in 1970s with rise of quants Psychology -> rationality/quants -> quant psychology Next step: is marketing quants Psychology -> rationality/quants -> quant psychology Pricing keywords, measuring effectiveness-> quantify marketing, make better decisions