Saturday, February 26, 2011

Google - sponsored search & auctioning

Google’s business model is certainly enviable, especially when one realizes Google’s profit margin. Google is bestowed to continue this growth at least for the foreseen future. Here is my take on Google’s advertising model…

Google follows an auctioning model and takes advantage of the competing businesses. Imagine you are a manufacturer of hard-drives, who wants to buy Google Adwords. The common words you would choose for advertising would be ‘hard drives’, ‘storage’, ‘backup’ etc. Now imagine if you have a competitor in your industry, which is often the case who also wants to buy the same adwords from Google. As a result Google can basically auction the adwords and can serve the best interest of the firm who pays the most.

For a moment, let’s side track and talk about auctioning. In auctioning you make more money, if there are more interested parties who are ready to buy your product. Guess what, the ‘real’ market value of the product will be close to the average of what the interested parties are willing to pay. But to be a winner of the auction you have to pay more, and more than the real value of the product. This means the auctioneer is the real winner!

Ok back to where we started…

In our example, the hard-drive manufacturer, not only have to pay more for their adwords because there are competitors in their industry, but also there are competitors for those adwords outside their industry (other industry verticals). Think about the other industries who would share the common adwords like ‘storage’ in our case, the container manufacturers, the public storage firms, the safe manufacturers all wants to use the same adword for advertising. Hence not only Google takes the advantage of competitors within an industry vertical, but also they take advantage across the industry verticals who share common words in their core business. Thus when there is growth in the market, Google is assured to reap money out of it.

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