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Rational vs Irrational Behavior in PPC

Does it help you, or hurt you when your competitors behave irrationally? At first blush, the answer appears to be: you're always better off when your competitors behave foolishly, but in PPC it's a bit more complicated than that. Years ago we helped build-out a PPC program for a small company that sold flower bulbs. They had a terrific selection, really high quality products and very competitive prices. Despite all these advantages, we couldn't afford to get their ads to the top position on the page because another company always had the top PPC spot. Whether you searched for "flower bulbs", "daffodil bulbs", "tulip bulbs", "dahlia bulbs", whatever, this other company's ad was at the top of the page. That company, however, sold light bulbs!!! Now this is an extreme example, and indeed, in this case these companies aren't even competitors, really; but for a while there they were competing for the same traffic. Indeed, their ad copy did not make it clear that they sold light bulbs, hence their CTR was probably quite strong. The question is: does the light bulb company's irrational ad buying actually hurt the flower bulb company? Perhaps not. Certainly none of the folks who intended to buy tulip bulbs online will have satisfied their demand by clicking on that other link. What happens to the traffic after that? They hit the "back" button and choose a different link. But will they choose another sponsored link, or will the previous experience sour their perception of the paid ads? If 100% of the traffic bounced off their site and moved on to other sponsored listings, a pretty good argument could be made that the irrational ad buyer hurts themselves with no consequences to the other competitors in the space. If, on the other hand some of the traffic is "lost" to the sponsored links, perhaps damage has been done, particularly to those advertisers whose organic listing doesn't make it to page 1 on that keyword. Think of traffic on a given search term as comprised of several parts which vary in size:
  1. Those who are willing to buy online if they find what they want
  2. Those who are willing to buy offline, but are interested in researching products online
  3. Those who are just kicking tires and have no intention of buying anything
  4. Those who were looking for something completely different and only clicked on an ad because they didn't read the ad copy before clicking. Eg: search term "wallpaper", user looking for a wallpaper desktop image, retailer selling wallpaper for...walls.
Most online retailers really only care about what happens to that first piece of the traffic, and would love for the other folks to click elsewhere. It seems to me that with each click on a sponsored listing where the offer is not competitive a small fraction of the valuable traffic is captured by the extravagant spender, the rest bounces to the next click which is more likely to go to a natural listing with each failed landing. That's great for those with strong organic ranking, but stinks for the rest. I've long predicted (and at some point my prediction may come true) that as more and more companies practice rational PPC advertising, the ordering of ads on the page will very closely track the sales dollars per click each company is able to generate. The higher the sales dollars per click the more a company can afford to pay. The search game will essentially be "won" KW by KW based on which company best satisfies the demand of the consumers. By and large, this will be a measure of selection, price and ease of shopping. Granted, some firms may have more aggressive marketing goals and may be willing to lose money to gain share for a time, and some firms may have lower COGs and more margin to play with and can hence be more aggressive than SPC might suggest. But, these will be relatively small effects once everyone learns to play the PPC game comprehensively and well. But this hasn't happened. There are still many irrational players in the space bidding far more for some terms than makes any sense from an ROI perspective, and bidding too little or having inadequate coverage on the rest of their list. The incompetent and irrational may hurt themselves primarily, but there's no question that in markets and on KW where the sponsored listings are dominated by folks who are paying more than they can afford, the consequences are also borne by those pushed off the page. It's strange to say, but retailers with competitive offerings may actually benefit by having their competitors bid wisely rather than foolishly. Of course, if the competition spends themselves into Chapter 7, that could be helpful, but short of that a rational marketplace may be the best for all parties concerned. Thoughts?
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