Avoiding the ‘Winner’s Curse’ of Paid Search

This article originally appeared on ClickZ.com on March 20, 2009. It’s still timely and relevant, however, because the concept of “The Winner’s Curse” remains an important construct when marketers attempt to fathom the auction-driven marketplaces run by Google and the other major search engines.

Face it. If you’re in paid placement search, you’re often a winner of the click. But you’re probably more often a loser, meaning you failed to figure out how to profitably drive your ad listing high enough into the SERP  for the keywords you wanted to get the clicks you wanted. Even in cases when you won the click away from your competition, you may have been better off not winning that particular click.

In addition to competition offline, you have competition online — those bidding against you for visibility in the search results. While not every competitor bids on the same keywords in the same search engines that you do, many of them do, particularly if you’re in a large industry and have a lot of offline competition.

If you define winning the search marketing war as having every keyword in a position higher than your competition, all the time on every keyword, it’s unlikely you’ll remain profitable. Instead, you may be in for a wild ride. You’ll also make Google (et al) very happy.

For any combination of industries and regions, you and your competitors will often want clicks on the same keywords. It would be unusual if you were the only bidder on even half your keywords (especially in Google where the number of advertisers is well over one million, according to Securities and Exchange Commission documents uncovered by The New York Times).

Google doesn’t publicly disclose how active its millions of advertisers are and how competitive they are with each other. One thing’s clear: there’s only room for 10 to 15 paid listings in a SERP. Available data for click density across SERPs shows that clicks are heavily concentrated in the top four or five positions, particularly if one to three ads are displayed above the organic (unpaid) results.

As a result, most search engine advertisers fail to capture the lion’s share of clicks they’d love to have but can’t afford. The majority of advertisers have to make do with the scraps (lower volume clicks occurring at lower positions). If you recently launched a campaign, you will suffer from several disadvantages, including a poor Google relevance score (Quality Score) and a campaign that isn’t freshly optimized.

Consequently, you may end up as a SEM who is forced to live on scraps. After all, your campaign is much newer than that of your competition.

If your competitors are smart (and some of them may be), they’ve had months or years to experiment with ad copy, landing pages, offers, and keyword match types. Unless you’ve got something really special to offer or have a very strong brand to trump their finely honed campaigns, chances are you’ll have to pay more to grab clicks away from them.

This brings us to the concept of the “Winner’s Curse,” which generally applies to common-value auctions for items such as paintings, houses, or cars where the winner is the high bidder. In these auctions, a bidder clearly estimates an asset’s value as being greater than the value placed on the asset by all the other bidders. In many cases, that estimate differs so much from the other estimates, it’s highly likely that the winning bidder overpaid.

In paid search, every marketer puts a different value on clicks from a specific keyword, engine, time of day, and geography. Because there isn’t a common utility or value of the click to the marketer or advertiser, each advertiser should bid rationally based on estimates of a click/visitor’s value to them. The “winner” in paid search doesn’t even necessarily get the click every time (each time a SERP is displayed, it’s a new auction); your bid only controls your likely position and the odds that your improved visibility will get the click.

There’s another interesting factor in paid search that makes the Winner’s Curse analogy more fascinating. Sometimes there’s more than one winning bidder per search result.

In a single SERP, a searcher may navigate to you or your competition and then hit the back button. Or, the searcher might open several paid or unpaid pages in quick succession in order to take advantage of background content loading while perusing the first result to load.

What’s important to take away from the concept of the Winner’s Curse in the context of paid placement keyword auctions billed on a CPC basis? You or other bidders may overpay if you’ve misestimated a click’s value. Additionally, in the absence of information about the click, you may be forced to push bids higher than you normally would.

Because you aren’t given an opportunity to re-bid in real time on a SERP-by-SERP basis, you must manage bids based on a variety of targeting and campaign settings. A particular search within the Google network, for example, may be originating from Ask.com, AOL.com, or Google. Plus, a new or a returning customer may have performed the search.

Lacking this information, you’re typically going to err on the aggressive side. That’s because once you’ve missed the opportunity to grab this searcher, you may never get that opportunity again and lose out to your competitor.

The better you are at estimating the true value of a click from a particular keyword, engine, and set of targeting parameters, the less often you’ll end up with the “Winner’s Curse” — a paid click that doesn’t convert to a profitable sale, become positively influenced, or take other positive steps toward a purchase while visiting your site.