Search advertising and its impact on small business startups

by
Adam Rust

I am very concerned about Google’s impact on our economy. From my perspective, Google is starting to capture profits that should go elsewhere. Google takes revenue that previous advertisers, operating in more competitive media markets, could never capture. The effect is particularly problematic for startups.

Today, newly founded online businesses have no choice but to buy advertising on Google, as the company can dominates the places where consumers research their purchasing decisions. Due to how internet services naturally lead to monopolies, little can be done outside of regulatory intervention.

Let me explain what I mean. Take a moment now to search for “hotels in San Francisco.” You can try this experiment with your mobile device or on your desktop; the results differ but the point remains the same. You will see that Google has established a stranglehold on the market for online hotel bookings.

When I search with my phone’s browser, the query returns paid Google AdWords advertisements at the top of the page. Google displays results from Hotels.com, Priceline, Travelocity, and Hotel Tonight.

After paid search comes Google’s travel service. Google has a display with searchable buttons and prices to four hotels. I can scroll down to see another 480 options.

Google will earn revenue from each click-through to the first four results via AdWords. It will capture lead generation revenue for all bookings that come through the travel service panel. The only exception would be the next result, a review by Trip Advisor of San Francisco’s ten best hotels. After this sole organic search query result come four more AdWords listings.  

Even the TripAdvisor result is itself designed to route revenue back to Google. Through its newly-introduced search panel service, Google appends a set of answers to the bottom of the TripAdvisor search. Search panels expand (the “accordion”), allowing Google to display content without moving a searcher outside of the first-page result. In essence, Google has given a visitor a second chance to drive revenue to the company.

Indeed, every time a consumer uses the internet to research a purchase, Google stands to profit. Google Keyword Planner, a tool for creating Google AdWords campaigns, says the average cost-per-click for “hotels in San Francisco” is $2.16. Placement of an advertisement at the top-of-page costs more; the price will be lower by the end of the first page. However, the cost to find a customer swells well beyond the cost of a click. In only a fraction of the instances when a consumer has clicked through to a site, does the visitor then convert. Not everyone puts something in the online shopping cart, and to the example of a hotel search, only a subset of visitors follow through to choose a room. It costs a lot to advertise on Google.

Advertisers refer to the decision funnel as the “customer journey.” In such a path, a potential customer goes through the following steps:

1. Decide to travel to a destination.

2. Learn where a room can be purchased. If necessary, some shoppers may take the additional step to determine critical points of differentiation in rooms.

3. Determine which brands offer the combination of services and products that match their idealized room choice.

4. Determine an ideal price point for rooms meeting the customer’s criteria on the desired date.

5. Seek the ideal price among hotels of similar quality.

6. Purchase a room.

At any point in this journey, a consumer might click on an advertisement, and in every step but the last, the visit would not have a chance of leading to a sale. Many visitors click through for reasons that have nothing to do with a potential purchase, such as when a consumer wants to find a phone number or address. Many clicks could occur after the decision to purchase, such as to find the address for a subsequent mapping request.

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consumer using search engine to purchase from a small business

So far, I have only demonstrated that Google has built a fantastic business model – a result that does not by itself elicit anti-trust concerns. Last year, Google captured approximately seventy percent of desktop browser searches and 85 percent of all mobile queries. According to Moz, a well-known search tool, 71 percent of search traffic clicks occurs on the first page. The first five results get more than two-thirds of clicks. As a result, advertising content left off of Google’s first page disappears in a digital desert. The difference between creating great content and hoping people find it, versus, paying Google to direct them there, is the difference between having heads in beds and having empty hotel rooms.

Yang may have understated Bing’s relevance, as the second-best search engine still provides 30 percent of desktop searches. After that, things fall out precipitously. Yahoo has approximately 3 percent of worldwide search; Ask.com, whose algorithm puts an emphasis on author expertise, gets just 35/100ths of one percent of search. Google’s is coming close to attaining a stranglehold on mobile – at last count, it took 85 percent of that space.

The concerns over competition stem from Google’s market share. By its dominance inside the channel that has become the de facto mode for consumer decision-making, the company has established control over market prices. They have what Warren Buffet would term a “moat” – a lasting advantage where new rivals face barriers to entry.

Going back to my example – let me offer some background on the economics of hotels. Hotel operators work with low marginal costs. After paying for utilities, IT, and staff, amortizing the cost of their physical plant, and contributing any fixed fees to their franchisor, most of their costs have already been covered. The remaining expense, in the form of wear-and-tear on furniture plus doing the laundry – amounts to about five dollars.

All of that should underscore the vital role of marketing inside the hotel industry. My uncle, a former hotel executive, likes to say that a good hotel “puts heads in beds.” The difference between a hotel that sells 60 percent of its rooms versus one that can sell 75 or 80 percent of rooms is the difference between losing money and earning a profit.

In a healthy state of affairs, consumers would benefit from that situation through last-minute deals and the like. Look around – that’s generally not how it works. Instead, much of the margin goes to Google because buying attention through AdWords is expensive.

With a little bit of simple math, a curious person can see how much it costs to place advertisements on Google. Imagine hypothetically that a company can buy clicks for two dollars. Sounds like a great deal, right? It would be, except for the implications of the customer journey that I described above. Consumers search at each stage of their decision-making process, and as a result, plenty of paid clicks are made by people who are not ready to buy a room. One industry publication pegs the conversion rate for hotel website searches at a mere 2.2 percent. At two dollars per click, the hotel’s cost-per-sale has blossomed to $91.09! Better-managed hotels might do better given their ability to hire top search-engine-optimization services; the same site says the most effective companies can increase their conversion to t 5.6 percent, reducing their overall cost to just thirty-five dollars.

All of that serves to increase the cost of doing business. The fact that consumers have discrete steps in decision-making, and that each step triggers a click that then transfers funds from the customer-seeking business to Google’s AdWords service, aligns perfectly with Google’s per-click business model.

If Google sold its services based on conversion rates, it would be different. With a pay-for-success model, businesses would share risk with Google.

Advertisers pay the freight – and take the risk on their SEO efficiency - because they have little choice. Google has won a winner-take-all sandbox. Search will never be a duopoly. Pepsi and Coke can compete for market share, each capturing a substantial portion of the market, but search engines are different. The second-best solution fails fast.

“It’s not like any of us wants to use the 4th best navigation app,” said Andrew Yang during the October Democratic presidential debate, “there’s a reason why no one is using Bing today. Sorry, Microsoft, it’s true.”  

I would contend that Google undermines startups. A new company, without a reliable customer base, has to pay to educate consumers about their goods. While an established hotel chain might advertise beginning with the third step of the customer journey, a startup has to pay to start with the second step. The hotel chain begins with a known presence inside a solution that meets an obvious need. The startup does not have the first and may, if the product itself is a new idea, need to spend to message on the latter as well.

The anti-competitive impact of digital monopolies on our economy is not limited to Google in search. How many Etsy businesses now devote most of their revenues – not profits – back to paying for the cost of their Instagram ads? This downward force against small businesses isn’t hypothetical: I spoke with a “customer advocate” at Etsy on this very topic. She said their clients were struggling to afford to advertise in search, on Facebook, and Instagram.  

Our experience with AdWords

In my experience, the cost of AdWords never made sense. We were a startup with a limited budget. While we might have learned how to make better use of AdWords to find customers at the right place in the customer journey, it would have been costly. Most SEO firms told us the cost of their services started at $50,000 – before AdWords.

WiseWage’s story underscores the influence Google has on the choices that ultimately become available to customers. WiseWage markets bank accounts, primarily to unbanked and underbanked workers, through an online portal. We only market accounts that do not have overdraft fees. Most banks pay for their checking accounts with overdraft fees. In some instances, those fees constitute more than half of the revenue derived from checking. The banks that offer these accounts could afford to outbid us. Google searches direct consumers to companies providing services and products that have enough operating margin to afford Google.  

Google’s Keyword Planner says a first-page bid for “get a bank account” is plus/minus $7; a top-of-first-page bids average out at $16.71. Big banks pay those costs since customer acquisition costs for an overdraft-enabled checking account range from two hundred to four hundred dollars. By contrast, banks buying ads for overdraft fee-free accounts budget between forty and seventy-five dollars to get an account. Given conversion rates of five to ten percent, it’s untenable to use AdWords for our “do-good” project.

There is hope without Google. If you are an aspiring small business owner, I hope you will conclude that you can find people without Google. We spent $32,000 to create AdWords and display campaigns. We received very little in return, and as a result, our strategy now focuses on developing content with the intent to attract organic search. We have tripled our hit count since we initiated this effort back in August. We are producing better results without Google, but it has taken much time to learn. We have the benefit of patient foundation funding. If we capitalized WiseWage through venture funding or personal capital, we might have run out of time.

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