Thursday, June 11, 2009

Google Article in Wired Magazine

Just read a nice article by Steven Levy at Wired about Google’s economic model. None of it is particularly new, but it does a good job of highlighting innovations beyond search.

Key Take-Aways

  • The first major innovation was in auctioning off a slate of ad slots each time a search query was made, and billing advertisers based on clicks on the ad, rather than impressions. Both were major departures for vendors/advertisers, who were familiar with drawn out auctions on eBay, or CPM based ad pricing on Overture.

  • A major innovation in Google’s auction process was the use of “second-price auctions”, where the winner of each keyword auction pays the price of the next highest bidder. The process reassured bidders they wouldn’t be a paying much more than the next guy, and ironically, provided enough comfort to actually result in higher bids over the long-run. Anyone who buys via AdWords knows how this affects their thinking in placing bids.

  • Auction winners and price is also determined by a set of algorithms which determines the quality and relevancy of the ad and associated landing page. This “quality score,” is meant to ensure high click rate and satisfaction for the consumer and advertiser. It also allows Google to predict click-through rates and improve its own business.

  • Google uses a “keyword pricing index”, which similar to the Consumer Price Index in that is measures the relative value of keywords to one another. This is indicative of how much emphasis Google places on data accumulation, trend analysis, and constantly improving its product for advertisers and consumers alike.

The most important I gained from this article is a reminder that Google did not anticipate the intricacies of its business model, let alone the auction model in advance. This is not to say they had no clue how to make money. Early on, they know the value of search provides users, that search implies "intent" and that intent is perfect for monetization. Ultimately, their success came from emphasizing consumer experience, customer experience (advertisers), and harnessing the results to further improve and refine the model and product. Google long ago ceased to be merely search company, and is now an economy unto itself.

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