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This is a very insightful comment, specifically the second tangent.

by cm2012 9y ago

dalbasal 9y ago
Cheers cm. This has actually been fairly clear (if you have exposure to ad buying) since early days, but I've heard relativley little talk of it. They put a lot of effort into making ad "ROI"easier for advertisers to track at a granual level. Micro1001 will tell you that firms spend upt to that point where marginal spend yields $0 marginal profit. In most markets this is pretty academic. Spending isn't that granual and return isn't that transparent. In the simple economic model, the assumption is that marginal profit on the 2nd to last dollar spent is more than $0, and the dollar before that is even better. On adwords, it's typically more "efficient." Initially adwords leaned into this, with their "bid-for-ranking" approach. Pay more per click, get more clicks. You could bid to optimize for profit, profitability or volume, as you wished. An 8th place ad might cost a fraction of a 2nd ranked one. Then, they dropped the RHS ads and focused on getting more clicks to the highest paying advertisers. This has brought adwords close to an on/off decision. There is no more "bid-for-volume" dynamic. The highest bidder takes the whole pie. Th upshot of all this is that average roi and marginal roi are the same, approaching $0 in competitive markets. There are a lot of markets where this is completely played out. That is, Google get a cut (anywhere from 10% to 50%) equivalent to the average margin that advertisers earn on whatever they're selling. The advertiser is whoever has the highest margin. Insurance, for example.
- lmm 9y ago
  > There are a lot of markets where this is completely played out. That is, Google get a cut (anywhere from 10% to 50%) equivalent to the average margin that advertisers earn on whatever they're selling. The advertiser is whoever has the highest margin. Insurance, for example. Sounds like actual insurance has been commoditised, whereas Google is still making monopoly rents on advertising. There's some kind of analogue of Amdahl's law: the cost reduction from commoditising part of the work of producing a product is smaller than you would think, because the cost will increasingly come to be dominated by the parts that can't be commoditised.

This is a very insightful comment, specifically the second tangent.

by cm2012 9y ago

This is a very insightful comment, specifically the second tangent.

Cheers cm. This has actually been fairly clear (if you have exposure to ad buying) since early days, but I've heard relativley little talk of it. They put a lot of effort into making ad "ROI"easier for advertisers to track at a granual level. Micro1001 will tell you that firms spend upt to that point where marginal spend yields $0 marginal profit. In most markets this is pretty academic. Spending isn't that granual and return isn't that transparent. In the simple economic model, the assumption is that marginal profit on the 2nd to last dollar spent is more than $0, and the dollar before that is even better. On adwords, it's typically more "efficient." Initially adwords leaned into this, with their "bid-for-ranking" approach. Pay more per click, get more clicks. You could bid to optimize for profit, profitability or volume, as you wished. An 8th place ad might cost a fraction of a 2nd ranked one. Then, they dropped the RHS ads and focused on getting more clicks to the highest paying advertisers. This has brought adwords close to an on/off decision. There is no more "bid-for-volume" dynamic. The highest bidder takes the whole pie. Th upshot of all this is that average roi and marginal roi are the same, approaching $0 in competitive markets. There are a lot of markets where this is completely played out. That is, Google get a cut (anywhere from 10% to 50%) equivalent to the average margin that advertisers earn on whatever they're selling. The advertiser is whoever has the highest margin. Insurance, for example.

lmm 9y ago
> There are a lot of markets where this is completely played out. That is, Google get a cut (anywhere from 10% to 50%) equivalent to the average margin that advertisers earn on whatever they're selling. The advertiser is whoever has the highest margin. Insurance, for example. Sounds like actual insurance has been commoditised, whereas Google is still making monopoly rents on advertising. There's some kind of analogue of Amdahl's law: the cost reduction from commoditising part of the work of producing a product is smaller than you would think, because the cost will increasingly come to be dominated by the parts that can't be commoditised.