Databases Reference
In-Depth Information
Therefore, the auction allows for a floating price (i.e., a valuation, which is an
appraisal of the value of something) for each keyphrase for a ranking of advertise-
ments, from highest to lowest, depending on the demand for that keyphrase. So, an
online auction allows for a floating price for each keyphrase-advertisement-position
combination on a SERP.
Why can everyone not just pay a set price?
There are three main reasons:
•
Different keywords have different values
. The keyphrases for our frame shop might
be very moderately priced, as most framing is not a high-margin business relative
to some other businesses. Keyphrases related to high-priced luxury goods, poten-
tial class action lawsuits, and other high-priced services are worth much more.
Because no one really has this knowledge in advance to determine this value,
search engines let the market decide via the auction. So, one can view an auction
as a
price discovery mechanism
, which is needed in sponsored search because the
search engine cannot possibly know how to price the different keyphrases a priori
(i.e., in advance). In general, the keyphrase values depend on the profit margin of
the products sold and the likelihood of conversion for a given keyphrase.
•
The SERP has limited screen real estate
. There can only be so many ads, and in
many keyphrase markets there are far more advertisers than there are spaces for
their ads. So, the search engines again let the market decide who gets the space
based on price. Those who bid the highest obviously want the limited real estate
more than those who bid less.
The effect of
•
ad rank
. We have discussed the effect that ad rank has on click-
through rate (CTR) and conversions (see Chapter 4 on advertisements). Advertisers
generally want their ads to be at the top of the results listing on the SERP. The
online auction is the mechanism for determining which advertiser gets their ad in
the various positions. Again, those who bid the highest obviously want it more
than those who bid less.
On the surface, our sponsored-search auction is fairly simple. There is an advertiser
who selects a set of one or more keyphrases related to a product or service. There is
typically more than one advertiser for any set of keyphrases. Therefore, each adver-
tiser interested in a keyphrase states a bid, which is the maximum amount that the
advertiser is willing to pay per click for a given keyphrase. This, in essence, is the
sponsored-search auction.
However, beyond this simple explanation, there are a lot of unanswered ques-
tions. How does the advertiser decide what to bid? When does the payment from the
advertiser to the search engine take place? What triggers this payment? How does the
search engine decide where to place an ad on the SERP listing?
Our simple explanation actually skips over a lot of complexity.
Let's Talk Auctions!
What is an auction?
At its core, an auction is an allocation mechanism. The term “auction” is from the
Latin root “auctus,” meaning “to increase.”
