The Meta-Search Paradox and Value of Online Aggregators

Priceline is an online hotel booking service with inventory that is also directly available from Marriott, Intercontinental, Hilton, and many others. Priceline receives a commission for every room reserved, a commission that is less than the profit that the hotel reaps from the booking. However, in online search ad auctions,  Priceline’s ads are somehow able to appear higher than the ads of any of the individual hotels. Considering that Priceline makes less money per booking, how is it able to pay more per visitor than the hotels?

AdWords is Google’s search ad marketplace and is the most prevalent ad auction online. It uses a formula to determine ad position based on the following inputs: advertiser cost-per-click (CPC), a “quality score,” and the click through rate (CTR) of the ad for a particular search term. The quality score is based on ad relevance (to the search term), landing page experience, and expected click through rate (CTR).

Assume that the auction formula inputs for a Priceline ad and a Hilton ad on a search query for “hotel room in Boston” were the same – same CTR, same ad quality, etc. It seems impossible for Priceline to be able to outbid Hilton in this case, but paradoxically, they they are able to outbid individual hotels on a huge variety of keyword queries.

Suppose a simplified scenario where there are only 10 hotel providers in Boston: Hilton, Marriott, Starwood, and 7 others. Each of the 10 have 10 rooms available for a particular night that a user is interested in. Imagine a user who clicked the Google Ads of each individual hotel before making a decision. Each of the hotels would have to pay for the user to click their ad, even though 9 out of 10 got no benefit. Thus, each one has only a 10% chance of attracting this person’s business, given that he is committed to buying a hotel room in Boston. If a hotel has to pay Google for 10 ad clicks to make one room sale, those ad payments start to add up and eat into the profit margin of the room sale. In contrast, an aggregator like Priceline who has deals with each of the 10 direct players, will have 100 rooms in its inventory. It has a much higher chance of actually gaining a conversion since the consumer is likely to find exactly what they are looking for on Priceline. The aggregator has a higher conversion rate and therefore it can pay more than a direct advertiser to attract a user to its site, despite a lower profit margin for a sale.

In addition to this structural benefit that aggregators benefit from, users often appreciate aggregators because they simplify the buying process. The CTR of an aggregator and is often higher than those of direct players which, coupled with the higher purchase conversion rate, means that aggregators can bid even less and still maintain the top ad positions in search. Aggregators are valuable to users as they minimize the need to shop around across a highly fragmented industry. It is much easier for the user to compare amenities, prices and location in one place. The breadth of listings gives consumers the further confidence that they are making an informed decision.

Furthermore, aggregators can seem like an independent third party and thus foster trust. A user that visits a hotel’s website directly, isn’t likely to have full trust in the reviews that are displayed since they might be biased. A third party that aggregates review information is likely to be more trustable. This isn’t to say that a third party is necessarily trustworthy, but rather that consumers are more likely to trust their reviews and/or recommendations.

You might ask why the hotels would continue to support this structure and fund a channel that undercuts their margins. The answer primarily lies in the fragmented nature of the marketplace. The aggregators would only be threatened if a large majority of hotels in an area colluded to pull their contracts. It is not in an individual hotel’s best interest to turn off this marketing channel and they are unlikely to be able to come to a deal with their direct competitors. The result of this fragmented structure is that the aggregators continue to thrive online.

This model works in a surprising number of fields. Flights, hotels, rental cars, apartments, home services, online courses, and many others.

In addition to providing deep breadth of listings for their users, aggregators can further differentiate themselves by helping users in the decision-making process. This is becoming especially important as online consumers seek the simplicity associated with being served an answer on what to do by a trustworthy expert. Unfortunately, some companies exploit this user desire, by, for example, promoting products that bring in the highest affiliate commission rather than the ones that are truly the best.

There is an opportunity for new companies in many fields to step up and take their role as quality raters and custom recommendation seriously. For example, the company bestreviews.com is focused on getting real expert input on specific products and recommending products in all categories on the basis of the combination of expert opinions and public reviews. Similarly, users will value eversence.com, the well-researched science-based supplement recommender.

As the online economy continues to grow and evolve, the role of online aggregators will also have to adapt if they want to stay competitive. I believe that the aggregators will further differentiate by creating more value by providing complimentary services such as deep research and trustworthy recommendations.

By: Liza Yermakova


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With over 1 billion monthly active users, its hard to ignore the success of social media site, Facebook.  But with privacy experts and skeptics worrying about our personal data being sold to the highest bidder, many discerning individuals are still highly skeptical of Facebook, which is shown in the incredible growth story so far for Ello.

I considered myself to be one of those skeptical anti-Facebook people.  Facebook being a company where I would never work because I didn’t believe in their mission.  That is…. until I put my “marketer” cap on and took off my “user” cap, in which my high moral standards dropped fairly quickly.

From years of working on AdWords, I was a strong believer that Google had the ultimate online advertising product.  I felt loyal to AdWords. Proud of it, for some reason. But as I’m now that I’m an ex-Googler, I actually tried using Facebook for marketing, and I was surprised by the ease of use as well as the ability to effectively target mobile users that Facebook offered.  This made me doubt my blind-loyalty to AdWords.

Facebook’s ease of use

When I was offered a job at Google working in online advertising, my Googler friend, who had guided me through the interview process remarked that by getting experience with and learning AdWords, I would always be employable.   And now that I’m outside Google and have worked with several startups and small companies, I realized how true that statement was.

AdWords is complex.  Knowing how to effectively use AdWords is a skill, and also sometimes even an art to ensure that your advertising dollars are being put to good use.  To show just how complex it is, Google AdWords has qualification exams.  Four of them.  The length of time to complete all four exams without any preparation is 450 minutes.  Imagine now how much prep work is needed to prepare for 450 minutes worth of exam questions?  Let me say it again… AdWords is complex.

Facebook, on the other hand, is surprisingly simple to use.  Facebook Ads are focused on allowing marketers to follow simple GUI-built use-cases, rather than expecting marketers to understand the frameworks (campaigns, ad groups, max CPCs, etc) that AdWords imposes, which forces marketers to fit their use-cases within the AdWords frameworks.

For example, the image above is the starting point when you click the “Create Ad” button in Facebook.  It very clearly articulates what goals a marketer may be trying to achieve, and by clicking on each goal, you get an even more thorough description so you can choose the most appropriate goal for your campaign.  Once you do that, Facebook gives you fields to fill out with the content of what you want your ad to be, which demographic you want your ad shown to, the amount you want to spend, etc.  Simple, right?

Or, for even more basic-level advertising, there is simply a “Boost Post” button within a Facebook Business page.  This “Boost Post” button allows you to show whatever content you were posting anyway to your subscribers, but only show the content to a larger audience beyond those who are already following you.  All you need to enter is the amount you want to spend and the demographics you are targeting.  It’s that easy.

Targeting mobile users

In Facebook’s second-quarter earnings call, they announced that 62% of their revenue came from advertisements on mobiles.  Facebook has over 1 billion mobile users, with over 500 million people accessing Facebook daily from their mobiles.  As the world continues to shift from PCs to mobile internet access, any online marketing platform’s ability to target mobile users is critical, and Facebook seems to be doing a great job.

My own experience with Facebook’s marketing for mobile apps has made me an evangelist.  For an app that I co-developed, we had a budget of $3000 to get our initial base of users to articulate the app’s value.  With Facebook, we were able to make our budget go a long way, as our acquisition costs to get users to download the free app were less than $1.00 per user.  When our team was considering other marketing mediums for getting our initial user base, nothing that we were considering was as inexpensive as Facebook was for us.  Therefore, we gave Facebook all of our budget and acquired 3500 users.

Facebook was a highly effective medium for me to get users to download my app.  When trying to do this in AdWords, I found out that it is possible to have a campaign focused on app downloads, but it took me several minutes using help center articles and digging in setting up a new campaign in AdWords to find the app-specific campaign settings, and remember: I am an AdWords wizard.  I also contacted Google support then to see if they had any benchmark cost per installs for apps, so I could compare this with my Facebook metrics, and they unfortunately did not have any benchmark data, but they did say they were working on it.  So, AdWords could be effective, but from reading posts on the topic on Quora, seeing the difficulty in setting this up and the lack of benchmark data, I would definitely stick with Facebook for my app installing marketing needs.

Conclusions

I cannot ignore that AdWords definitely has its strengths too. In my opinion, direct-response ads on Google search on desktop computers cannot be beaten for efficacy in driving conversions than any other online marketing medium.  But as mobile usage grows and apps and social media become more ingrained in our Internet usage, will Google AdWords stay at the top of the advertising platforms?  Even if Facebook marketing cannot topple AdWords, Google should at least be learning a few things from Facebook’s platform, because as I was scared to previously admit, Facebook marketing is actually pretty good.

Sources:  http://investor.fb.com/results.cfm


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