Google didn’t become the behemoth that they are by having the best technology. They didn’t invent a faster computer to retrieve the most accurate search results in .15 seconds. They became the leader in search and online advertising by being creative – and they did it through auctions. Yes, Google is the world’s largest auction company.
Have you noticed the advertisements that come up whenever you do a common Google search? They show both on the top and side of your search results (see image) and match incredibly closely to what you are looking for. Have you ever thought about how Google decides to place the accurate ads? Behind the scenes a genius little auction is held for every search that takes place.
Advertisers place bids for what they would be willing to pay to show up next to search terms that they believe are close to their product. Google also ranks the relevance of the ad using a complex algorithm. These two pieces of data are combined to rank each potential advertisement. Then a Vickrey auction is held to determine the price each advertiser must pay and the order of the ads. I highly recommend this extremely concise explanation from Wired magazine (only 226 words).
Well that isn’t so complicated, how much money did they make with that idea? Sure one step of the process is technologically complex, but even if their relevance ranking was created in one day, it would be able to get the job done. The real genius is applying an automated auction system to online advertising, optimizing for price and relevance while allowing the advertiser a high degree of control. So that begs the question – where else can I apply an efficient auction process that will make me billions of dollars?
Of course there are a lot of reasons Google is where it is today, I don’t mean to oversimplify things. But this simple auction is a good chunk of the $24 billion in revenue they made last year.
More:
- Descending-clock auction for electricity – Trade Electricity Like Pork Bellies
- Terrific full Google article in the Wired magazine issue – Secret of Googlenomics: Data-Fueled Recipe Brews Profitability
that really was a concise and clear explanation in Wired. Good thing you told me it was only 200-something, wouldn’t have read it otherwise.
here’s something i always wonder about though. i never ACTUALLY click on the ads that pop up after a search or on my gmail. and i imagine i’m not unique (at least not in this situation). so how do ad companies measure the efficacy of online advertising? and what is the difference in terms of bang for your buck b/t super smart google algorithms and traditional media? i’ll investigate (one of these days). 🙂
Maybe I should always provide word counts for the things I link to – most of the readers here don’t actually click on the links (that is a stat I can track). That’s one of the reasons why there are far less links in my recent posts. It’s also contrary to how I browse – when I read online I am constantly opening up tabs until Firefox can’t take it anymore.
The google ad links are only marginally useful. I rarely click on them, the last example I can think of was searching for parking by the San Jose airport – one company advertised a coupon for $7 a day parking. I’d imagine less tech savvy people click on the links more than you or I. We have been trained to gloss right over them while others will slowly take in the whole page or start at the very top.
There are a ton of marketing people out there try to figure out your bang for the buck question. Even just focusing online, there are soooo many different ways you can advertise, which one is the best? Let me know what you find out.