Saturday, June 14, 2008

Hal Varian on advertising auctions

Google Chief Economist Hal Varian has a post on the Official Google Blog on "How auctions set ad prices".

What is particularly interesting about the post is where the description differs from the theory. For most Web advertising auctions, advertisers are ordered by (bid * CTR), where CTR is the clickthrough rate on the advertisement. The net effect is that people end up paying per impression, for the space used on each page, which is what publishers generally want.

However, Hal spends quite a bit of time talking about Google's use of "Ad Quality Score". He indicates that, in addition to CTR, Google uses the "quality of [the] landing page" and the "relevance of the ads and keywords in the ad group to the site" as well as "other relevance factors", but details are not clear.

On the one hand, some kind of ad quality score makes a lot of sense. The CTR for a given advertisement shown in a given context to a given user can only be estimated. So, the use of "Ad Quality Scores" could be viewed as an attempt to get a more accurate estimate of the CTR.

On the other hand, this kind of looks like something tossed on top of CTR to penalize spammers or other lower quality advertisers. If that is the case, it becomes less clear what this change could do to the efficiency of the auctions.

Either way, whether it fits into a framework of getting better CTR estimates or it is a patch to fix a market failure in current advertising auctions, Hal's post is something to think about further.

3 comments:

Anonymous said...

Bid == Value of the ad to Google
Score == Value of the ad to the user

Google wants to show ads that
maximize revenue while also maximizing
long-term benefit to the user because
happy users are more frequent users
and evangelizers.

CTR is a simple score but can be
gamed (e.g., an ad that screams
"Free iPod!"). Ideally, Google
would like to somehow calculate
the true benefit and relevance
of an advertiser's product to
the user, e.g., by looking at
the advertiser's website, reputation, the quality of the particular
product being advertised, its
reviews, the relevance of that
product to the user, the conversion
rate of the ad etc etc. So the
score is a black box that provides
an objective measure of how much
real value an advertiser/product
provide a user. Determining this
score in all its glory is probably
going to require a lot of invasive
looking profiling.

BTW, the bid itself is not that
simple either, since advertisers
might lie about their bids just
to screw with competitors while
staying within their budgets (i.e.,
not making it a losing proposition).
So it's possible the bid itself
might evolve as Google figures out
a different measure of how much
value an advertiser provides to
Google, in the context of the
competition with other advertisers.

Bud said...

As an AdWords practitioner, this is not news at all. Further, over time, quality essentially boils down to CTR.

What may be more interesting is the notion of efficiency horizon. In a single auction, money might indeed be left on the table. But, what leads to better results in the system as a whole and over time? That question is probably impossible to solve analytically but seems the more important one for Google.

One thing to noe, the idiosyncracies in Google's quality ratings are one of the biggest barriers to novice advertisers, leading to questions like the following: Why doesn't Google consider me relevant for what I sell on my site?

Anonymous said...

The click has value, so CTR is part of the equation. But if an annoying ad reduces future clicks, that has negative value. So it could be that these random other factors are attempting to account for expected change in clicks, not only the immediate click, but also predicted negative (or positive) effects from future clicks.