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search engine
advertising is most
valuable when
firms have just
a few hard-to-reach
customers.
creases substantially. Interestingly, we
find the solicitation restrictions only
matter when it is especially difficult to
locate clients. These restrictions only
affect prices when there are relatively
few searches for that keyword in that location. If there are many people searching for that string, and therefore many
potential customers, then the restriction on offline targeting does not matter. Search engine advertising is most
valuable when firms have just a few
hard-to-reach customers. Therefore,
it is match difficulty that is driving
the relationship between ad prices and
the regulation.
checking our Results
To ensure our results were reliable, we
performed a battery of statistical tests.
We tried different definitions of personal injury. Also, it could be that the
results are driven by the underlying,
unobserved condition of commerce of
a particular state, and not by people’s
real advertising choices. For example,
the state’s personal injury attorneys
could be systematically more aggressive
at pursuing customer leads than regular attorneys, which could lead both to
their valuing leads more and their being regulated more by that state. So,
to make sure our result is real, we performed a “falsification test.”
We chose a type of law that was similarly motivated, but that would not increase the price paid for ads. This was
a type of law that set limits on lawyers
taking cases on a contingency fee basis. In states with contingency fee limits, personal injury lawyers paid relatively less for personal injury keywords
compared to other legal keywords. So,
the falsification test reassures us that
there was not something about states
that enact lawyer regulations that can
provide an alternative explanation of
our results.
What it means
We show that targeting generates the
most value in small markets, where
the ability to target using traditional
direct response media is limited. We
provide clear empirical evidence of the
extent to which advertisers value context-based advertising’s ability to target
very narrow markets. This enables a
“long tail of advertising” that is not feasible under the traditional broadcast
advertising model. Whether customers are difficult to find because there
are few of them or because it is costly
to communicate with them, search
engine advertising helps firms overcome these challenges and therefore
generates considerable value to firms,
customers, and (of course) the search
engines themselves.
The profitability of search markets
for search engines is highly dependent
on the availability of alternative marketing communications channels both
online and offline. It is therefore not
clear that extending electronic auctions
to other advertising networks without
context-based advertising in place will
necessarily be profitable. For example,
it is not clear that Google’s plans to
bring online auctions to TV advertising
and conduct these auctions on the basis of “daypart, geography and […] demographic,” will prove as successful as
its prior online search auctions that are
conducted using specific context-based
pricing and extreme micro-targeting.
We have illustrated this process on
lawyers because it is convenient to do
so, but there is nothing to suggest the
results are unique to legal advertising.
We believe we will see similar spreads
in prices for local market services in
which online advertising permits a
high level of targeting.
Reference
1. Goldfarb, a. and tucker, C. Search Engine Advertising:
Pricing Ads to Context. net institute Working paper
#07–23, 2008.
Avi Goldfarb ( agoldfarb@rotman.utoronto.ca) is an
assistant professor of marketing at the Joseph l. rotman
school of management at the university of toronto.
Catherine Tucker ( cetucker@mit.edu) is the douglas
drane Career development professor in it and
management and an assistant professor of marketing
at the mit sloan school of management.
