Secret of Googlenomics: Data-Fueled Recipe Brews Profitability

With Microsoft’s Bing launched today, I’ve been spending some time trying to understand the whole online advertising thing better.  I’m trying to figure it out using a $50 budget to advertise our company with Microsoft adCenter.  The principles look similar to Google‘s, but are undoubtedly different enough under the covers to keep Microsoft up at night.  To be fair, I’ve also tossed a $50 budget Google’s way to try out AdWords as well.  We’ll see which one brings better traffic to our Web site.

Ever wondered how Google determines which ads are shown on a given results page?  A great article in this month’s Wired Magazine entitled Secret of Googlenomics: Data-Fueled Recipe Brews Profitability tells you how it all works (minus the special sauce, of course!). plus a lot more about the history of how Google got to where it is today with ad auctions.

Here’s an excerpt:

Most people think of the Google ad auction as a straightforward affair. In fact, there’s a key component that few users know about and even sophisticated advertisers don’t fully understand. The bids themselves are only a part of what ultimately determines the auction winners. The other major determinant is something called the quality score. This metric strives to ensure that the ads Google shows on its results page are true, high-caliber matches for what users are querying. If they aren’t, the whole system suffers and Google makes less money.

Google determines quality scores by calculating multiple factors, including the relevance of the ad to the specific keyword or keywords, the quality of the landing page the ad is linked to, and, above all, the percentage of times users actually click on a given ad when it appears on a results page. (Other factors, Google won’t even discuss.) There’s also a penalty invoked when the ad quality is too low—in such cases, the company slaps a minimum bid on the advertiser. Google explains that this practice—reviled by many companies affected by it—protects users from being exposed to irrelevant or annoying ads that would sour people on sponsored links in general. Several lawsuits have been filed by would-be advertisers who claim that they are victims of an arbitrary process by a quasi monopoly.

You can argue about fairness, but arbitrary it ain’t. To figure out the quality score, Google needs to estimate in advance how many users will click on an ad. That’s very tricky, especially since we’re talking about billions of auctions. But since the ad model depends on predicting clickthroughs as perfectly as possible, the company must quantify and analyze every twist and turn of the data. Susan Wojcicki, who oversees Google’s advertising, refers to it as “the physics of clicks.”