A Prisoner's Dilemma? PPC Advertising During The Current Financial Crisis

Last week, Google announced Q3 earnings of $4.92 EPS, beating analyst expectations and boosting the stock. Year on year, Google's revenue was up 31% for the quarter, with operating profit margins of 36.5% (non GAAP).

Those are astounding financial results. Google is clearly enjoying better results than many of its advertisers.

Some folks think Google must be cheating. I don't. While both Google and its advertisers would be well-served by increased Google transparency, I believe Google's operations and profits are honest.

This raises the question: how can Google surge while many of its advertisers slump?

PrisonI'd suggest we're starting to see a prisoner's dilemma playing out among Google advertisers.

Desperate for revenue, advertisers are tempted to increase the aggressiveness of their advertising. Advertisers feel they must spend more in advertising to generate each revenue dollar, because they need the sales, or because they sense their competitors are advertising harder, or because they fear their competition is about to start advertising harder.

So CPCs climb.

Meanwhile, the inventory of quality clicks -- that is, clicks from searchers who go on to purchase -- is a fixed quantity, independent of click prices or aggregate ad spend. Indeed, while advertiser fear puts upward pressure on CPCs, consumer fear during the financial crisis drags down conversion and average order sizes.

CPCs up. SPCs down. Profitable for Google, but a losing recipe for Google advertisers.

Short-term, the "rational" action in a prisoner's dilemma is to "defect". In the PPC context, considering only the short-term, this means advertisers pushing on the gas, paying more to ensure top position, and buying more clicks.

Long-term, however, in the iterated Prisoner's Dilemma, cautious "cooperation" yields better results. In the PPC context, this means advertisers should focus on their bottom lines, not their top lines. Should think long-term, not short-term. Should not pay more for clicks than those clicks are worth. Should focus on their P&L, not on how the competition is bidding.

Last week we offered six tips for PPC strategy during the current financial crisis. To whit: have clear economic targets. Use strong bid tools. Shift ad dollars to stronger channels. Don't overpay an agency. Protect your bottom line.

And most of all, stay calm. Over-bidding helps none of us, except Google.

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