The current blowback on digital advertising giants, Google and Facebook, comes as a surprise to me. I have written about the many problems of digital advertising performance measurement over the years, sometimes on this blog, but also in my public talks. But I was skeptical that there exists an incentive to point to the elephant in the room. My talks about accountability in digital marketing has had a shelf life of a single delivery.
So, I was pleasantly surprised to learn that the CEO of Restoration Hardware, a high-end furniture retailer, recounted an internal conversation he had with his marketing team about Google Adwords at a conference organized by Goldman Sachs. Zerohedge (link) has a delectable excerpt from those remarks, but before I get to those words, let me provide some context for those not familiar with how Google Adwords functions.
Google makes dozens of billions of revenues each year from its Adwords product. Advertisers pay Google money to put their “search ads” adjacent to Google search results. These Adwords ads are shown above the so-called organic (i.e unpaid) search results, or to the right of the main results section, or increasingly, also at the bottom of search results. It used to be clearly delineated with a yellow background but over the years, Google has deliberately reduced the design differential between the paid and unpaid results, thus driving up their revenues via unconscious clicking on those Adwords ads.
These pictures show how Google search result display has evolved over time:
For example, Pottery Barn, one of RH’s competitors, buys the keyword “Pottery Barn.” This means that when a Google user types “Pottery Barn” into the search box, an ad from Pottery Barn shows up as the top result on the page, in the Adwords section which is inserted above the unpaid results. The first unpaid result is the home page to Pottery Barn. So the user has the option of clicking on the ad (an action that causes PB to pay Google) or clicking on the first organic result below those ads (an action for which Google does not directly collect revenues). Whichever option is chosen, the user ends up on Pottery Barn’s home page. See the following illustration:
The CEO of Restoration Hardware described how he decided to curb spending on Adwords. In the past, RH did exactly what PB did above. RH buys the keyword “Restoration Hardware” and pays Google every time a user searches the keyword “Restoration Hardware” and clicks on the first link on the page, which is the ad that is formatted to look like organic, unpaid results. Today, RH no longer buys those ads.
The following is an amusing description of the interchange between the CEO and his marketing team, which eventually led to pulling the Adwords budget [bolding is due to Zerohedge, not me]
We had our marketing meeting in the company several years ago and the online marketing team was pitching to double their budget, right, and at the time, say, look, nobody in the company is doubling their budget. But tell me why you believe that's the right thing to do. And they said, well, look, our customer acquisition cost and our ad cost is the lowest in the company. And I said, well, tell me about the data, show me how. And they said, well, people who click through the words that we buy on Google, the ad cost was lowest. And I said, how do you know that they're clicking on the word and going to the website because of the word you bought versus they saw a store or they received a source book? They said, oh, we know.
I said, well, how many words do you buy? They said 3,200. 3,200 words. I said, well, what are the top words? How are they ranked, the ranking of the words? Oh, we don't have that, right. And I was getting the look at like, oh, Gary is kind of one these old brick-and-mortar guys. He just doesn't get it.
And I said, well, what are the top 10 words? And they didn’t have the information. I said, why don't we cancel the meeting and come back next week when you have the data? I'm sure that Google sales representatives who are taking you to the expensive lunches and selling you the 3,200 words have that data. So why don't we get the data and then let, review the data?
And they came back the next week and we sat in a meeting and all of a sudden, I can tell you there's a little change in the faces. They had to wear it kind of down. Everybody kind of came in. I said, so what did we find out?
And they said, well, we've found out that 98% of our business was coming from 22 words. So, wait, we're buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it's the word Restoration Hardware and the 21 ways to spell it wrong, okay?
Immediately the next day, we cancelled all the words, including our own name. By the way, we are paying for the little shaded box above our words and said, oh no, we have to hang on to that because Pottery Barn might squat on top of us. I said, excuse me? I said, if someone goes to a mall or a shopping center and they're going to Restoration Hardware and there's a Pottery Bam there, they're already squatting, okay? It doesn't mean they're going to go into their store. If somebody wanted to buy a diamond from Tiffany and just because Zale's is sitting on top of them in a shaded box doesn't mean they're going to go to Zale's and buy a diamond.
I mean, I can't believe how many companies buy their own name and they're paying Google millions of dollars a year for their own name, like maybe if this is webcast, right, a lot of people are going to go, holy crap. They're going to look at their investments. They'd go, maybe we don't need to buy our own name. Google's market cap might go down...
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What are the key lessons from this anecdote? Let me summarize them here for you:
1. This is a CEO I want to work for, if I were in the job market. This is someone who asks the right questions, and uses data in the right way to make good business decisions. Bravo!
We encounter several of the key selling points used by Google (and other digital advertising agencies), and amusingly, this CEO shot them all down.
2. The first selling point is that smirk: anyone who questions the effectiveness of digital ads is the old guy who doesn’t get digital marketing. Well, this CEO still wanted the marketing team to produce data, and so they went back to find him the numbers.
3. The second selling point used by digital advertising agencies is convenience: the vendor does all the work in delivering the ads, and analyzing and reporting performance; the user just needs to pay the invoices, and copy and paste the performance numbers to their presentations. You pay someone to do a job and you ask that person to tell you whether he/she did a good job or not – well, what answer do you expect to hear? In this case, when the CEO has questions about the data, the marketing team goes to the Google sales rep to get the answers.
4. Like almost everyone, the CEO learns that substantively all of the performance is due to “branded” keywords, that is to say, keywords containing their own brand name – Restoration Hardware, and 21 different mis-spellings of the words. Yes, that means for many Google users wanting to visit RH’s website, instead of going there directly, they type Restoration Hardware into Google, and click on one of the first links to get there. Google is acting as the toll booth that these users pass through on the way to RH. Advertising sales reps have a way to counter this argument.
5. They say that if you don’t buy your own brand name, your competitor might scoop you. This is indeed true. The picture below shows that Pottery Barn has purchased the Restoration Hardware keyword, after Restoration Hardware stopped spending on Adwords. You see that the first link goes to Pottery Barn in the Adwords area while the first link in the organic search area goes to Restoration Hardware.
The CEO has a perfect response to this selling point. “If someone goes to a mall or a shopping center and they're going to Restoration Hardware and there's a Pottery Bam there… It doesn't mean they're going to go into their store.” So true. If someone is specifically searching for “Restoration Hardware”, what’s the chance that this person sees a Pottery Barn ad and click there instead? Not high, I reckon.
Even when they have the data, other issues (eg principal-agent problems) will mean that firms keep wasting money. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785009
Posted by: Deaneckles | 09/15/2017 at 03:32 PM
I'd recently considered the same thing. To access the website of an airline I used Google to find them and was offered a sponsored search so I could search for flights direct from the Google search results. I instead clicked on the search result. If they had offered me other airlines (there are only 3 majors in Australia) I would have ignored them. I want a specific company and I will almost certainly stick with it. Now if I was after accomodation in my destination and searched, I might well be swayed by having something appear first as an ad, and that is what happens, and I expect that is something that benefits advertisers.
It all comes back to what I think you've mentioned before which is to first understand your market. Then decide the appropriate questions, get reliable data and interpret it. Really nothing different than any other area of statistics.
Posted by: Ken | 09/30/2017 at 12:32 AM