1. Lecture 11 Economics of Online Advertising

2. Lecture Plan HW 3 Required additional lecture readings:
HBS case: Google Inc.
HBS industry note: Paid Search Advertising
Online Advertising Models
Long Tail
Real time bidding

3. Online Advertising

4. US Consumer Time Spent versus Media Ad Spending, 2013

5. PAY-PER-CLICK Advertising Model
Targeted advertisement based on two effectiveness measures:
Click-Through Rate (CTR): specifies on how many individuals (X) clicked on an ad, out of the total number of individuals exposed (Y) CTR = X/Y. CTR measures how often visitors click on the ad
Conversion Rate: it specifies the percentage of visitors who took the conversion action. Conversion rate gives a sense of how often visitors actually act on a given ad, which is a better measure of ad’s effectiveness than the CTR measure

6. Recent History of CPC Method
Cost Per Click is the predominant advertising payment method, made popular by search engines such a Google and Overture (now part of Yahoo!).
Google introduced CPC AdWords program in 2002.
Combining a particular ad payment method with a particular targeting method. For Google and Yahoo! the two main models are the keyword-based PPC and the content-based PPC models.

7. Google’s Pay-per-Click Advertising Model
AdWords
A program allowing advertisers to purchase CPC-based advertising that targets the ads based on the keywords specified in the users’ search queries.
Ad Rank = CPC x QualityScore
QualityScore- a measure identifying the “quality” of the keyword and the ad combined
The more the advertiser is willing to pay (CPC) and the higher the click through rate on the ad (CTR), the higher the position of the ad in the listing is.

8. Example of Search Ads in a Search Engine

9. Paid
Organic
Paid

11. The “Golden Triangle” for Search
Engine Results

12. Creating an AdWords Ad

13. Temporal Pattern of Influence in Consumer Auto Searches

14. Google AdSense
Google AdSense is a program for website owners to display Google’s ads on their websites and earn money from Google as a result.

15. Uses of AdSense
AdSense for Search (AFS): publishers allow Google to place its ads on their websites when the user does keyword- based searches on their sites.
AdSense for Content (AFC): the system that automatically delivers targeted ads to the publisher’s web pages that the user is visiting. These ads are based on the content of the visited pages, geographical location and some other factors.

16. AdSense for Content
Contextually-targeted ads
Example: cheese.com

17. Cost Per Click Two problems with the Cost per click model:
Although correlated, good click-through rates are still not indicative of good conversion rates
It does not offer any “built in” fundamental protection mechanisms against the click fraud

18. Problems with PAY-PER-CLICK
CLICK FRAUD: People clicking on products/advertisements excessively without the real intent of actually making any purchases.

19. Click Fraud and Invalid Traffic
Click fraud refers to clicks generated with malicious or fraudulent intent.
Invalid traffic includes both clicks and impressions on AdWords ads that Google suspects to not be the result of genuine user interest.
This covers intentionally fraudulent traffic as well as accidental clicks and other mechanically generated traffic. Although advertisers are not charged for these clicks or impressions, this traffic may still result in valuable site visits and conversions.

20. How and Why Click Fraud Occurs
There are two primary incentives for committing click fraud:
AdWords advertisers may try to attack competitors by raising their costs or exhausting their budget early in the day.
AdSense publishers may click ads appearing on their own websites in order to inflate revenue. .

21. How and Why Click Fraud Occurs
The most common methods for carrying out click fraud attacks are:
Manual clicking
Click farms (hiring individuals to manually click ads)
Pay-to-click sites (pyramid schemes created by publishers)
Click bots (software to automate clicking)
Botnets (hijacked computers utilized by click bots) .

22. How and Why Click Fraud Occurs
On average, invalid clicks account for less than 10% of all clicks on AdWords ads.
Google claims that the vast majority of all invalid clicks on AdWords ads are caught by online filters..

23. Challenge to advertisers
Keyword choice
This is the most critical
Market efficiencies: high CTR words have high prices
What matters is the cost effectiveness: the ROI or ROA
E.g., plurals get more clicks and more conversions than singulars: “Diamonds” more valuable than “diamond”
How much to bid
Measure cost-per-acquisition and/or ROA

24. ROI and Opportunity Cost
Calculate the missed opportunity cost (forgone revenue)
# of people searching for a specific keyword
engine share (Google ~= 80%)
expected click-through rate
average conversion rate
average transaction amount x x x x
E.g.10,000/day x 80% x 10% x 5% x $100 = $4,000/day

25. Bidding Strategy Determine value per click
Probability of purchase x profit margin
Determine relationship between cost and clicks
How much do you have to pay to get x clicks?
Equivalently use incremental cost per click

26. Real Time Bidding Required “reading” for the exam!
Note:
What are the most current trends in advertising buying?
What are the implications of such changing conditions for consumers, advertisers and content providers

27. BIG DATA AND ADVERTISING

28. What is BIG DATA?
Collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications.
Data sets grow in size in part because they are increasingly being gathered by ubiquitous information-sensing mobile devices, aerial sensory technologies, software logs, cameras, microphones, etc.
The volume of business data worldwide, across all companies, doubles every 1.2 years, according to some estimates

29. What is BIG DATA?
Data companies are collecting enormous amounts of information about consumers.
They sell information about certain demographic factors:
whether you're pregnant or
divorced or
trying to lose weight,
about how rich you are and
what kinds of cars you have
Are you an allergy sufferer?

30. How much do these companies know about individual people?
names, addresses and contact information, demographics, like age, race, occupation and education level
Data on life event triggers:
getting married,
buying a home,
sending a kid to college
getting divorced.

31. How much do these companies know about individual people?
Marketing divisions of Credit report agencies (Experian, Equifax) can and do sell:
names of expectant parents and families with newborns
marketing.html
Salary and pay-stub information

32. Where are they getting this info from?
The stores where you shop sell it to these data brokers.
Store loyalty cards is a primary source of data
Government records and other publicly available information
Department of Motor Vehicles may sell personal information such as name, address, and the type of vehicles you own — to data brokers
Public voting records, which include information about your party registration and how often you vote can be sold to data companies

33. What about Online?
Some data companies companies record and then resell screen names, web site addresses, interests, hometown and professional history, and how many friends or followers you have.
Some companies also collect and analyze information about users’ tweets, posts, comments, likes, shares, and recommendations.
Collects information about which social media sites individual people use, and whether they are a heavy or a light user.

34. Regulation
9 Data brokers are currently under review by the FTC. (1) Acxiom, 2) Corelogic, 3) Datalogix, 4) eBureau, 5) ID Analytics, 6) Intelius, 7) Peekyou, 8) Rapleaf, and 9) Recorded Future.)
The FTC is seeking details about:
the nature and sources of the consumer information the data brokers collect;
how they use, maintain, and disseminate the information; and
the extent to which the data brokers allow consumers to access and correct their information or to opt out of having their personal information sold.

35. The Long Tail The internet vs. brick-and-mortar A changing economy
Nearly unlimited capacity
Distribution and shelving costs approaching zero
Global distribution channels
A changing economy
Popularity no longer has a monopoly on profitability
Can generate significant revenues by selling small number of millions of niche products vs. selling millions of a small number of “hits”

36. The Long Tail
Marginal costs approaching zero, nearly unlimited capacity, and global distribution channels give rise to a market in which firms can generate significant (in some cases the bulk of) revenues by selling a small number of millions of niche products as opposed to relying on selling millions of a small number of “hits.”

37. Wal-Mart vs. Rhapsody Wal-Mart Itunes/Rhapsody/Spotify
39,000 songs on CDs in average store
Must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit
Less than 1 percent of CDs sell that much
Therefore, can carry only “hits”
Itunes/Rhapsody/Spotify
Millions of songs in archives
Cost of storing one more song is essentially zero
More streams each month beyond its top 10,000 than in the top 10,000
Therefore, no economic reason not to carry almost everything

38. Long Tail Examples: Travel

40. Netflix Long Tail