“There is a surprising, if not bizarre (fact that) more competition in auction can actually produce more revenue, rather than less” - Google CEO Eric Schmidt.

This is what is truly great and utterly frustrating about the auction model for PPC (e.g. Google Adwords, Yahoo Sponsored Search).  Schmidt’s statement is true for Google in the corporate sense just as it is for us advertisers; as we’re all competing for the same keyword we drive the price up.  And Google takes it to the bank…  It’s genius.

But wouldn’t that mean that the more advertisers there are the less valuable the advertising is?  Higher CPCs = lower ROI…  Right?  Now that Yahoo is updating their system to be more like Google’s, I’m also assuming that their CPCs will naturally raise closer to the level of Google’s.  Meaning advertisers won’t be able to water down their CPCs with Yahoo as some have been known to do.

This will also have a profound effect on advertisers selling products with thin margins.  At some point the prices get too high to return a positive ROI no matter how effective you are at selling your product.  I think this has already started to happen to some extent in the travel industry where average CPCs have actually come down for some terms in the last year or so.  When you can’t make money anymore you leave, the CPCs come down for anyone left, you come back in, CPCs go up and it starts all over again.  Super Genius… Does Google see this as a limitation though?  It doesn’t appear so based on this article.

It does leave room for some alternative models, I believe…

Google faces mounting competition: CEO - Yahoo! News


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