Keyphrase cost inflation has happened faster than we expected, but we still think that small companies should invest heavily in Paid Search relative to other traditional media forms.

The reason for this is that Adwords subverts the typical advertising paradigm. In most advertising spaces, companies get to a size where advertising is as much an exercise in drowning out the competition as it is in getting their message out. Typical advertising lends itself nicely to this. Examples of this are yellow pages ads, billboards, advertising on buildings, radio ads, etc. The idea is to completely drown out competitors whenever possible.

Adwords changes things. Adwords (and now Yahoo! with Panama) has two major attributes that can be controlled: the RANK of a bid and its frequency of delivery. A small company could conceivably have ads ranked just as high as large companies if they decided to rotate them less frequently. The closest metaphor would be that they had a huge ad in the yellow pages, but in only 5% of the books.

What does this mean for small business? Well, for one thing, it means that they can effectively get their message out and the cost of that message can actually be commensurate with their size. A smaller company doesn’t have to move as much volume as a large one to be successful, so having more high-quality ads less frequently might be a great strategy. They can maximize their click-through rates with highly placed ads.

More importantly, it lets the smaller company compete on content with the big boys. If a keyphrase-ad combination is a portal, a company’s website is the tool that closes the deal. High-quality websites are surprisingly affordable, which means that a smaller vendor has control over their conversion rates. If a smaller vendor has a better site than one of the big players in a market, they will have higher conversion rates, and their overall cost per sale will be lower.

This, in turn, will give them more money to spend on the frequency that they deliver high quality ads.

So let’s hear it for Google giving a fair shake for the little guys!

Along with max cost per click, Google AdWords employs a “quality score” to determine where ads will rank for certain keyphrases. The quality score factors in click-through rates, ad quality, and landing page quality with respect to the keyphrases being bid on. This system has serious flaws. It is common for ads that have little or no history that are circulating for very specific keyphrases not to show because of a low quality score. This means some of the most relevant ads won’t show for specific queries because they haven’t had a chance to establish a history to demonstrate their quality. Automating the analysis of ad text and landing pages leaves a large margin of error that AdWords doesn’t compensate for. Worse yet, the system often assigns higher quality scores to ads that are not relevant. This is more common in cases of geographically targeted keyphrases. Sites that have ads circulating for specific cities might have ads circulating for products and services they don’t offer because their landing pages are specific to the location being searched. For instance, a real estate site for Pleasantville, New York, might have a high enough quality score to have ads circulating for search terms such as “pleasantville new york daycare.” Even though they are obviously not relevant to daycare services.

Setting higher max CPCs can offset low quality scores, but for specific terms that may have only a few ads circulating, the max CPC might be well over a dollar and still not show. The max CPC should be closer to ten cents for keyphrases like this.

The Problem

AdWords treats terms that are broad matched the same as terms that are exact matched. This means that if a query broad matches a term being bid on it is treated on the same level as a query that matches exactly the term being bid on (Either term could be bid on as a broad match. The distinction here is how the query in fact matches the term being bid on, not the matching set for the term). This is not a good way to have the most relevant ads showing. If an advertiser takes the time to bid on a term, it is likely that their site is more relevant to the term than a site that is broad matching the term. This is because people can’t possibly think of every variation that their ad might show for when they broad match a term.

AdWords should start treating these types of matches differently. Not only would it improve the relevance of their ads, it would give small advertisers more of an advantage in AdWords. Claims about the benefits of the “long tail” in PPC advertising would actually have some support.