Are eCommerce AdWords a waste of money?

[reddogmusic]

The recent article from eBay about the performance of their PPC campaigns got me thinking more generally about AdWords and whether maybe the whole thing (especially in the case of eCommerce) might be a complete waste of money.

Obviously, considering Google sucked several billion dollars out of the world last year using just AdWords, I hope not, but hear me out...

There are two reasons why I think AdWords (in the case of online sale of products in a competitive market) are a waste of money:

1. In a competitive market place, the bidding system necessarily means that the cost of an ad is as high as it can be for any given keyword.

What does this mean? It means that, given all bidding parties are intelligent agents (spoiler: they're not), the price of a sale will naturally approach the profit made on that sale and no-one (except for Google) will make any profit.

e.g.
Alex bids $2 to make a $5 return ($3 profit!), so Ben bids $3 to make the same return ($2 profit!), so Carla bids  $4 ($1 profit!), until no-one is making a return at all, or at least the return is so minimal as to not be worth the effort.

This is presuming Alex, Ben and Carla are intelligent agents. If they're not, it's highly likely that they'll bid more than their return (e.g. a bid of $6 for a $5 return leading to a loss of $1). In a real world situation where you can multiply these 3 agents by 100s, there is enough stupidity and general noise in the bidding that this is bound to happen.

Result? For your bid to succeed, you have to bid so much that it's not worth bidding.

So: don't bid on AdWords and spend your marketing money on something else.

2. If it did work, we'd all be rich

Let's say I'm wrong about the above. I can find a way to guarantee a positive return on investment (Google themselves constantly go on about how you can easily track and predict your ROI).
If this were the case, surely I could go to any bank or investor and show them my proof, borrow $100tn, and make both me and them trillionaires.
Why are there so few trillionaires??

I might be missing something big here (I'm sure I am) but I just can't convince myself that the system could ever work for anyone other than Google, who are effectively hoovering up the profits of every business in the world.

Please tell me I'm wrong!

[littlesthobo]

Well you certainly make a compelling case

In general I agree.  I suspect there will be a handful of clever ones tapping into the goldmines, not yet understood by the idiots

[EGOL]

There are two reasons why I think AdWords (in the case of online sale of products in a competitive market) are a waste of money:

I agree with you for 90% of the population.   I firmly believe that most people are blowing a lot of dough on Adwords.  In fact, I bet that most people do not make a profit from their Adwords spend - and they don't even know it.  Why?  Because they don't do the tracking and they don't do the math.  It makes their poor little heads hurt or they don't know how.

I have spent a LOT of time working at Adwords, I've attended the best Adwords training and I have read a lot about Adwords - much of that content twice.  Still, I find it very difficult to make money using Adwords - at least for the first sale.  However, if you can cultivate repeat purchases out of the buyer that is where you can make some money.

If you want to win at Adwords you must have the following advantages over your competitors....

--- lowest cost of goods

--- deeply discounted shipping done from regional fulfillment centers

--- inexpensive employees who make very few errors

--- very efficient wholesale buying, warehousing and fulfillment

--- website that converts enormous amounts of customers

Those are the easy parts.

After that you need somebody really really smart who can get your quality scores up to 10, weed out all of your money wasting keywords, weed out all of the nonprofitable products, know how to write ads and landing pages to convert customers.  Then you need a direct connect of data and authority between pricing, costs and bidding.

A few people have all of that in order.  Most people don't.

So, I agree with you for at least 90% of adwords bidders.  But I think that there are a few who can make profits on the first sale and more who can make profits if they can earn repeat business.

Average Joe Blowe selling cell phone cases out of his basement is going to loose his shirt.

[reddogmusic]

Thanks for such a full response, EGOL.

To put this in perspective, that means 90% of around $42 billion spent on AdWords in 2012 was wasted.

That's the GDP of Kenya.

[EGOL]

That's the GDP of Kenya.

Wow...

I think that the people makin' the money are the really big spenders.  Because if you are makin' money you probably don't have a throttle on the spend.

[mememax]

I don't agree with that. It depends on how much you rely on ppc. If the 90% of your traffic relies on ppc, the entrance of a new player will raise your costs but if you have organic traffic driving money to you you can reinvest it to adwords, this will increase your sales and even if you don't earn more money your achieving additional market share and difficulting the life of your competitors, in the long term alex ben or sara will be able to raise their budget and make the market more difficult for other players to enter. That's how you build sales and brand.

Ebay got other issues based on out of stock products, since they don't own their products they can't be sure that the keywords were they're bidding always get a product to sell. If you have a solid stock you can always bid on that terms. Also bidding in adwords doesn't mean to push only on high volume keywords but on on long tail too which helps you getting the user to the right page in the right moment. Consider that seo is losing visibility due to the new 7 results pack and local listings so any slot available in the serps is an additional business opportunity you can't miss. Adwords may be a waste of money if you're targeting broad keywords but can be highly efficient if you make manual and highly focused actions.

[john4math]

Larry Kim over at Wordstream put up a nice post about this here.  The short of it is eBay is doing a terrible job managing their account by targeting too broadly and over-relying on keyword insertion for their ad text.

I'm not really sure why you say you would take your marketing money somewhere else.  You can calculate your ROI from running Adwords, and you can calculate your ROI from running other marketing projects.  If you're seeing a better return from other marketing projects, shift your budgets towards those.  Why would you stop advertising on Adwords if you're seeing a positive ROI?

Quality score is another thing helping to level the playing field.  You can optimize your ad text and landing pages to increase your quality score, which can help you outrank competitors.  Remember that in your Alex, Ben, and Carla example.  If one of them can get their quality score higher, they're actually paying less for their leads.  Since it looks like eBay is advertising on a lot of very generic terms, have poor ad text, and have empty landing pages for some of them, they almost certainly have terribly quality scores for the majority of their keywords.

Adwords is always adding new features.  There are many advertisers that simply don't have the time or resources to learn how to use all the targeting options available.  Those that do will have an advantage.  Those of us who are optimizing our accounts will have an advantage by reducing our waste and giving us extra budget to invest in other campaigns.  I don't believe the Adwords market is completely efficient.

For #2, there's only so much volume you can bid for.  You can't invest $100 trillion dollars in any set of search queries, even if it converts insanely well.  You can only bid up to position #1 with 100% of the impression share.  For those long-tail queries that convert well, those usually have very little volume.

[ThompsonPaul]

Thanks for mentioning that WordStream article, John. Was trying to find it to mention here.

EBay is like the poster child for how to do Adwords badly, so using them as proof that Adwords doesn't work is a pretty flawed starting point.

RedDog starts out talking about straight eCommerce Adwords use, then extrapolates to all 42 billion of Adwords being eCommerce-generated. Also flawed assumption.

The reality for me is that Adwords can be used in many ways effectively by many businesses other than straight eCommerce head term bidding.

So while I definitely agree that folks not doing their math can easily drive the ROI down to useless levels, especially on head terms, it's not necessarily a universal issue.

Paul

[GKLA]

Amazing fact.  How long will it take for people spending mad cash on adwords - who are not quantifying their investment figure this out?  Will we ever see the decline of adwords?

Anyone remember goto.com - they were the ppc kings back in 1998!  The good old days .05 clicks brought tons of traffic and sales...

[DavidOriol86]

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