• by David White , October 20, 2006

When it comes to paid search advertising in the U.S. market, Google is the clear-cut leader. In Europe, it has nearly cornered the market, with a range of 66% to 85% of the search marketplace for each European country, according to MarketingSherpa's 2007 Search Marketing Benchmark Guide.

As with any business or industry, the leader becomes the standard for all to shoot for. In the case of paid search advertising, that standard is Google's opaque ad platform. And, as we all know, competitors are following suit with their own versions. MSN has already moved to the opaque model with adCenter, and Yahoo Panama is in the final stages of developing its own opaque advertising platform.

Because of Google's dominance abroad, European advertisers have become accustomed to competing in an opaque market. We on the other side of the pond are still adjusting, having first cut our teeth in open marketplaces. That door is closing and will soon be shut and locked with the key thrown away.

What's the difference?

The original paid search marketplaces were open and can still be seen on today's Yahoo paid search platform. In an open marketplace, ads are ranked solely on the basis of the advertisers' bids. Equally important, the bids of all advertisers are placed publicly for all to see. It is therefore easy to understand the relationship between the bid and the resulting ad position. If you want to place your ad at a given position, simply bid 1 cent more than the incumbent, and the position is yours.

Opaque marketplaces, as seen today on Google and Microsoft's adCenter, stand in sharp contrast. They are defined by two key characteristics:

1. Ads are ranked based on both the bid price and the click-through rate (CTR). Google's quality score extends this concept even further by including the quality of an advertiser's landing pages and ad copy when calculating an ad's rank.

2. Advertisers cannot see the CTR, bid or quality score for competitors.

These characteristics add complexity and present new challenges when compared to an open marketplace.

Challenges of an opaque marketplace

Traditional paid search bid management strategies rely on the information that's available in an open marketplace. Rules that bid to positions, bid jam and bid gap surf rely on data about competitors' bids--but you can't bid a penny over your competitor if you can't see the competitor's bid, as with an opaque market! Without this information, the bidding process can be a guessing game: you place a bid before knowing what position your ad will achieve.

Even traditional return on investment (ROI) or return on ad spend (ROAS) strategies can be less effective in opaque marketplaces. Conversion rates vary according to the position of an ad, and executing ROI or ROAS strategies effectively requires a detailed understanding of the relationship between the bid, position, actual cost-per-click (which is usually discounted from the bid), the level of traffic, and the conversion rate. Traditional keyword bid management systems that rely on the transparence of information in open marketplaces are at a distinct disadvantage. But there are techniques for using the opacity to your advantage.

Managing in an opaque marketplace

In an opaque marketplace, advertisers must predict the relationship among the bid, position and actual CPC before placing a bid. Accurately estimating this requires the intelligent use of historical data together with mathematical predictive modeling techniques. To bid effectively, the advertiser must estimate the entire bid landscape--but because one cannot expect to have data available for every position on every keyword, statistical modeling techniques must be used to cluster sparse data and predict the results available for positions where the advertiser has no data.

This modeling can be made more effective by supplementing it with specific insights about paid search. For example:

Premium placements at the top of the search results will receive a higher CTR than ads along the righthand side.

Bidding an ad into the top positions can qualify it for broader distribution across a search engine's syndication partners, which results in additional impressions and clicks.

These specific examples are meant only to illustrate the rich structure and numerous variables in paid search marketplaces. Models that include factors like these in addition to purely mathematical techniques can be even more effective in managing search within opaque marketplaces.

What now?

As marketers worldwide await the inevitable disappearance of the remaining open paid search advertising marketplaces, advertisers must stay ahead of the curve by putting in place the data-driven analytics systems required to succeed in opaque marketplaces. The traditional "pay for the highest position" approach of open marketplaces will not fly in the opaque model. Lack of data on keyword bids and positions will cripple those advertisers who do not embrace the statistical and predictive approach needed for succeeding in the opaque paid search world.

This is already happening in the Google-dominated European search industry, with resounding success. Advertisers in the U.S. will need to get onboard to achieve the same level of success.