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AdWords Brand CPCs on the Rise!

Several of our analysts at RKG noticed that brand CPCs on Google have been on a pretty steep upward trend. Individually they looked to see if there were affiliates or competitors bidding up their brand keywords, or if the brand terms were being served on non-brand queries. Finding no big changes there, we recognized that this wasn't isolated to a few clients, it was widespread. That prompted us to dig in. Let's look at data aggregated across a basket of long standing RKG clients. Over the last 12 months, Brand CPCs on Google have increased 80%. Looking at YOY comparisons to take out seasonal effects shows an even more dramatic picture of what's happening.

Google's Explanation

We raised these concerns with our Google rep and got a very credible explanation. Let's start this explanation with more data. If we back up our time window we see a much more complete picture of what's happening. The increase over the last 12 months is just reversing a slide that had happened for the 18 months before then. Again, looking at YOY changes makes the two trends quite clear. Brand CPCs are therefore, in Google's view, getting back to where they belong. From about February of 2011 to December of 2012 brand CPCs were falling, and it is only since then that they've started to rebound to previous levels. So what drove these trends? Interestingly RKG's very own Mark Ballard touched on the answer in last summer's 2012-Q2 Digital Marketing Report: All those extensions, site links, bigger site links, seller ratings, etc. had unintended consequences for Google. By increasing the real estate of brand ads, click through rates increased therefore Quality Score increased therefore CPCs declined. CTR has always been far and away the largest component of QS. We've said it, and Fred Vallaeys confirmed that in a fine post a couple weeks back. But anticipated CTR has to be measured carefully because of dependencies. Google wants to reward the ads that consumers like best, but page layout can distort its view. Positional dependencies are the most obvious. Suppose you have ten ads to show on a page and you don't know which ones users will like best. You order them based on bid as a starting point with the highest bid at the top. Lo and behold: you find that the ad you put at the top has a much higher click through rate than the one below it, the second ad has a higher CTR than the third on down the line. You seem to have guessed the ranking right the first time! Amazing! Amazing but wrong. The ads at the top have a huge advantage of prominence over the ads at the bottom on the right rail that has nothing to do with whether users prefer one ad over the other. To really determine which ads get the best user response Google has to normalize CTR by position on the page to take prominence out of the equation. Google has always normalized CTR for position so that they can determine the optimal arrangement of ads to maximize their revenue per impression -- ahem, er, to maximize utility to the user and advertiser. However, as they started creating extensions, sitelinks, seller ratings etc which applied only to the ad in top position they did NOT normalize the CTR for the enhanced prominence given to those ads. Those ads got a significant bump in QS and therefore a big reduction in CPC. It isn't clear whether this was an oversight, or part of the original plan which they've decided to reverse. It is clear that they've reversed course on this and that it has a clear impact on brand CPCs. Brand ads are the most obvious and easiest to research. It's possible that this has impacted other ads that are virtually always at the top of the page and regularly qualify for additional features. As we've always said, averages and aggregates lie. There are clients for which brand CPCs have been low for a very long time and only now have increased significantly. Others see much less dramatic swings. The key question is: what are you seeing?
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