Paid search ‘a waste of money’ for big brands (according to eBay)

eBay has courted controversy by claiming that paying for search ads has little effect on sales for large companies, according to its own research.


View larger image
The eBay study, presented at an economics conference held at Stanford University, found that most people who clicked through as a result of paid search ads were loyal customers who would have come to the site anyway.
“Incremental revenue from paid search was far smaller than expected because existing customers would have come to eBay regardless, whether directly or through other marketing channels,” said an eBay representative.
Analysts at eBay’s research laboratories analyzed the company’s sales after temporarily halting a large proportion of its paid search advertising, but retaining ads in some regions. They then compared both approaches from April until July of 2012.
What they discovered was a barely detectable drop in sales from eBay listings in the regions where the Google ads had been halted. While the ads did attract some purchases from consumers who had never or rarely used eBay, for consumers who had bought from eBay at least three times in 2011, the search ads had practically no benefit.
According to the study, of the $31.7 billion spent in the U.S. in 2011 on Internet advertising, the top 10 advertisers account for about $2.36 billion of the total spent.
“These companies generally use the same methods and the same consulting firms to design their ad campaigns and there are many reasons to think that the results we presented above would generalize to these large and well known corporations,” the study reads.
“This begs the question: why do well-known branded companies spend such large amounts of money on what seems to be a rather ineffective marketing channel? We believe that the reason is the challenges that these companies face in generating causal measures of the returns to advertising.”
“Removal of these advertisements simply raised the prominence of the eBay natural search result,” read the report by Thomas Blake, Chris Nosko, and Steve Tadelis from eBay. “Shutting paid search advertisements closed one (costly) path to a firm’s website but diverted traffic to the next easiest path (natural search), which is free to the advertiser.”
There is no suggestion that eBay now plans to change the way in which it currently spends on search engine advertising.
Google said that its own research suggested there was a significant increase in clicks as a result of search advertising.
But a company representative added: “Since outcomes differ so much among advertisers and are influenced by many different factors, we encourage advertisers to experiment with their own campaigns.”
The study also pointed out that analytical advice from Google — which is used by most consulting firms — is “not consistent with true causal estimates of ad effectiveness.”
Google offers its customers the following advice to calculate ROI:

Determining your AdWords ROI can be a very straightforward process if your business goal is web-based sales. You’ll already have the advertising costs for a specific time period for your AdWords account in the statistics from your Campaigns tab. The net profit for your business can then be calculated based on your company’s revenue from sales made via your AdWords advertising, minus the cost of your advertising. Divide your net profit by the advertising costs to get your AdWords ROI for that time period.

The advice, the study points out, does not account for the group of consumers who used paid search advertising on their way to a purchase but likely would have made that purchase even if they had not seen the paid search ads.
“The only way to circumvent this measurement concern is to adopt a controlled test that is able to distinguish between the behavior of consumers who see ads and those who don’t. As we have shown, once this is done correctly, estimates of ROI shrink dramatically, and for our case become very negative.”
The study also pointed out its findings would not be relevant for small or new businesses with little or no brand recognition.
Read the full report