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Ecommerce 2.0 doesn’t explain Google’s growth January 5, 2007

Posted by jeremyliew in Consumer internet, Ecommerce, Lead gen, Search.

I got a really interesting email in response to the 2007 Consumer Internet Predicitions post from Iggy Fanlo (CEO of AdBrite, ex President of Shopping.com and a guy who knows a thing or two about CPC advertising!):

You talk about cos like Zappos filling the SEM void, but the math still doesn’t work… if search revenues (online advertising generally) is rising at 70-80% and e-commerce (total, not just the established entities) is rising at less than 30%, AND folks still aren’t using search for branding, then what is going on?

(a) Either we are moving to a far greater lifetime value model for customer acquisition (which really is branding in disguise) OR

(b) There is an rapidly approaching upper limit on search revenue growth that approximates e-commerce growth (Google and others’ slice of pie cannot get much greater) OR

(c)There are lots of greater fools (small cos trying to get off the ground, large cos not watching their SEM spend with any discipline) and will still end up drying up in the end.


I’m going to hand-wave a little in my attempt at an answer here, but would love to hear comments from those more knowledgeable than I am about Google.

Google grew its revenues at 70% Year on Year according to their 2006 Q3 financials.

Lets say 30 percentage points of that came from the growth of US ecommerce as per Iggy (Comscore says 26%, I’ve seen others a little higher).

Search Engine Watch and Neilsen say that Google has increased its market share from the mid 40s to around 50% of all searches in the last year or so, which is about a 10% increase for Google, so that gets us to 40 percentage points of growth.

Google’s international growth is outpacing US growth as per their Q3 earnings slides: 92% vs 56%. I wheeled out my creaky excel and crunched the numbers, and this international growth premium over the US contributes about 14 percentage points of growth, getting us to around 54 percentage points.

Lead gen isn’t included in the ecommerce growth numbers, but is also clearly a driver of search engine marketing. According to the IAB, lead gen was up over 70% in H1 2006 over H1 2005. Its still a lot smaller than ecommerce, so perhaps that adds another 5 points of growth to get us to 59 points.

That still leaves around 10 points of growth that is likely due to increased pricing. I scanned some analyst reports which seemed to agree about pricing but couldn’t find size estimates

So Iggy is right. But its not as dire as it looks at first glance, or perhaps not as imminent. I agree with his point (a), that margins are getting skinnier and in some cases Search Marketers ARE applying a Lifetime Value analysis and taking a loss on customer acquisition for the first transaction. (I would disagree that this is branding in disguise though as it is still trackable). I don’t think his (c) is a major factor – people are being pretty rigorous in their ROI analysis in this area in my experience. But (b) is ultimately right – it has to be eventually. I don’t think we’re quite there yet though.

Comments and discussion much appreciated.

I’m going to post on Monday about Lead Gen in more detail as it generated a lot of comment discussion in the earlier post, and I think the SEM trends very relevant to that topic also.


1. Brian Breslin - January 5, 2007

Jeremy, do you think the big SEM spenders are going to eventually end up devoting lots of those budgets to optimizing and refining these campaigns? the PPC management people might end up making good money by giving advice on these ever more complicated systems.

2. patent-monkey - January 7, 2007

Two thoughts on what I agree is what appears to be unsustainable growth vectors:

1. Clearly, there is a total pie of marketing spend, and the spend online. If more traditional retailers, such as Best Buy and Circuit City are driving more sales via online business, then they are shifting dollars, but you may or may not see all of those main line retailer sales via their website statistics. Google getting more leads to retailer in-store pick ups could account for why there’s a gap in your calculations.
2. More small businesses are developing that sell via the internet and primarily ship from a manufacturer’s warehouse upon order. The main cost of business in this arena is advertising. For these businesses, I would dare say that these retailers are willing to take the slimmest of margins (they have very little fixed costs) while the advertising platform (Google, Yahoo, etc) and the consumer become the winner. This shift could represent a macro shift in the retailer supply chain that favors direct, product based ads on the web over in-store merchandising and in stock availability.

3. Clay Fisher - January 12, 2007

Being a search marketing veteran I couldn’t resist jumping in…

1) Causality: 30% US ecommerce growth does not have a cause and effect relationship with Google. Questions like, what caused that growth – have to be answered. Are the ecommerce companies you cited only marketing through search? Of course not, we don’t know what percentage of their marketing budgets are spent on search. So, we can’t say “30 percentage points of Google’s growth came from the growth of US ecommerce as per Iggy (Comscore says 26%, I’ve seen others a little higher).”

2) Head, Middle & Long Tail
You touched on this in your post, but it’s worth mentioning again. Iggy assumes that the middle and long-tail of Google advertisers have slowed growth like the Head, but, there’s no reason to assume those large head companies represent the whole.

3) “But almost every Google click is going to an online transaction somewhere – people still aren’t using search advertising for branding purposes. So what is filling the gap?”

B) Superior Conversion Rates
Advertiser profit margins are shrinking (more competition) but those margins are still better than other advertising vehicles. Advertisers are still pouring money into Google looking for more and more volume to make up for the declining margins.

For example, in 2004 a search advertisement in Google for the keyword ‘Canon digital camera’ would cost $0.20 per click and have a conversion rate of 10% requiring only 10 clicks or $2.00 to produce a transaction – leaving a net profit of $48. Since there were less people online at the time the keyword could only produce 10 transactions a year – yielding a $480 net profit for the company. In 2007, that same keyword has more competition and costs $2.20 per click. Let’s say the conversion rate has stayed the same, requiring only 10 clicks or $20.20 to produce a transaction. Now, since there are more people online and using Google, this keyword will produce 20 transactions leaving the company with a net profit of $596 (profit margin $50 – cost $20.20 x 20 transactions). In this example, the company’s profit growth is 24% where Google’s growth is 1,920% – ($20 in 2005 and $404 [20 clicks per transaction costing $20.20 per] in 2007).

This applies to both the head and tail of Google advertisers.

C) Alternative Success Metrics
I would challenge you on the comment; “But almost every Google click is going to an online transaction somewhere”. That is not the case. Advertisers have a number of different success metrics and one of them is what you later touch on; user registrations or lead gen. As marketers become more sophisticated (and Internet marketers are some of the most sophisticated thanks to the nature of the trackable Internet) they take into account other success/KPI metrics that are valuable to the organization. They blend metrics to create indices that place a higher value on a click than just an immediate transaction or ROI.

This applies to all Google advertisers but specifically to the head.

D) Intermediary Advertisers
Many advertisers on Google are intermediaries who are playing the click arbitrage game. Whether they’re monetizing advertisements when visitors get to their pages or reselling someone else’s product a click from Google is valuable to them. There isn’t necessarily an immediate transaction

E) Untrackable Activity
Many ecommerce websites fail to track the source of transactions; for example, phone orders. This is one area where advertisers are simply saying “well, we started advertising on Google and phone sales went up so let’s keep spending money there”. These advertisers will keep spending but they’re not necessarily spending wisely.

One final comment regarding “) There is an rapidly approaching upper limit on search revenue growth that approximates e-commerce growth (Google and others’ slice of pie cannot get much greater)” While Google’s revenue growth is slowing it won’t necessarily be abrupt. We do not know the margins companies are working with and must assume they’re still very strong. Once Google’s usage rates top off we’ll see a crunch of increased competition for keywords (volume will flatten) and an adjustment/shakeout in the marketplace. Google will benefit from this.

Wow, that was alot…

4. jeremyliew - January 13, 2007

I think you’re spot on- money is already being spent optimizing PPC campaigns, and as Clay points out, the result is better conversion rates.

you raise some good points, some of which echo points I make in my post as slightly different points. I think the key thrust that we both can agree on is that not all of the increase in paid search is being driven by more sales (whether online or offline as patent monkey points out) of either goods or leads, and that the gap must be resulting in margin compression for merchants (to Google’s benefit, as you say) whether through intemediaries, inefficient spend, or simply higher costs to acquire customers.

5. warehouse distribution - June 30, 2007

warehouse distribution

Hi. Very nice blog. I\’ve been reading your other entries all day long..lol.

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