What comparison search engines are doing wrong
In college I studied economics. To be honest I thought that most of the stuff I learned would never be applicable in the real world. BYU focuses a lot on microeconomic theory and how transactions take place in an imaginary world with a bunch of assumptions that may or may not be true. In the past week, however, I have realized that some of the lessons I learned about artificial price floors do apply to the real world.
With Google I am welcome to bid on tail-terms with essentially no minimum bid. Anybody who uses Adwords a lot knows that this is not always the case, but in general the minimums are either very low or do not exist. This is because Google understands the economics of the situation and they know that if advertisers come in at a $0.05 bid and are successful, eventually somebody else is going to catch on and bid $0.06. Looking at the big picture, eventually advertisers will bid the price of keywords up to an equilibrium which, according to economics, should be pretty close to their margin on the product.
Comparison engines, on the other hand, don’t quite seem to get it. They impose minimum bids on their advertisers - in our industry, the minimum bid is usually $0.40 or higher. For this reason, most advertisers are only going to advertise high margin products because they will lose money on low margin products. For example, if I have a $3 USB cable and my cost is $1, I have a $2 gross margin (of course the net margin is much lower when I account for overhead). Let’s assume I don’t have any overhead costs so I actually have a $2 net margin. At a $0.40 cost-per-click, I will need to have a 20% conversion rate just to break even. In my industry 20% is unheard of. When all costs are accounted for my conversion rate must actually be much higher.
At this point I really have two choices:
1) I can raise the price of the USB cable to protect the margin for comparison engines despite the fact that I can stay right-side-up at my current cost on Google and Overture and I may risk losing sales on these proven channels.
2) I can list only my high-margin products with the comparison search engines.
Both of these approaches are detrimental to the consumer for obvious reasons. Option #1 results in higher prices and option #2 results in the inability to find low-margin products using comparison shopping engines. As I have met and spoken with various internet retailers I have found that most stick with option #2.
At the ChannelAdvisor Summit, Trent Scoffield of Shopping.com points out that merchants earn nearly $18 on every dollar spent on Shopping.com compared to $4 with Google. I am naturally skeptical of these numbers (I could not verify them with Netplus), but let’s assume that they are accurate. This actually makes sense because merchants aren’t likely to advertise small products on Shopping.com even though they may have high profit margins in terms of a percentage of their material cost.
From a consumer’s perspective this tells me that comparison engines are the place to go for high-consideration products, like a new DVD player or a top-of-the-line mp3 player. For smaller purchases, however, it would stand to reason that Google (or froogle) will have a broader selection of merchants at different price points.
I think there is a real business opportunity for a comparison shopping engine that uses a Google-like approach. By bringing down the minimum bid the site would give access to companies that specialize more in low-consideration, low-margin products and would give consumers an alternative to froogle, which does have its own problems based on the fact that there are absolutely no barriers to entry. Over time an engine that does not impose minimum bids would reach an equilibrium where the company with the lowest costs would win - the epitome of a capitalistic market. The site would have more integrity with consumers because it would have a broader range of products ranging from smaller-margin to high-margin products and the company would reap the benefits of offering an advertising outlet for a broader range of merchants.
10 Comments »
RSS feed for comments on this post.
| TrackBack URI
You can also bookmark
this on del.icio.us or check the cosmos
I noticed ChannelAdvisor partners with a company called SortPrice.com. They offer free product listigs via data feed or enhanced listings for a flat rate per month. I use them and froogle for of my site and I am doing well. Real great approach for them to put the consumers and merchants first.
Comment by gameguy — September 28, 2005 @ 6:47 pm
[…] Preston Wily from SewellDirect, wrote a smart piece about minimum bid amounts on the shopping comparison engines and how the artificial price floors are detrimental to consumers. You should definitely check it out. This entry was posted on Thursday, September 29th, 2005 at 8:22 am. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Leave a Reply […]
Pingback by Comparison Engines » Blog Archive » What Comparison Engines are Doing Wrong — September 29, 2005 @ 9:22 am
There is a major fallacy in your argument. You’re assuming that shopping engines are like Google in that there is a correlation between bid price and sales.
If my experience is accurate, then there isn’t. We have thousands of products and are in all the major engines. We bid $0.01 above the minumum. We get lots of clicks on products that we’re most competitive on and few clicks on products we’re not as competitive. That’s why the engines cannot eliminate the minimum.
What the engines should do is link the minimum to the retail price. So for example, the minimum for any product that sells for less than $10 is $0.10.
Comment by David — October 6, 2005 @ 11:32 am
David,
I appreciate your post. I don’t really understand, however, why the engines can’t eliminate the minimum (which Google has taken steps toward doing). Competition will drive the bids up - for example, if I have a $200 margin on a product then I am probably going to want a top-3 spot in Google (for syndication purposes). Depending on my conversion rate I would definitely outbid my competitors up to a point where I am maximizing revenue - just a standard auction model. In my experience I am never anywhere near minimums on products like this so they are irrelevant.
If comparison engines act the same, using this argument, they should eliminate the minimums. I think it is a great point, however, that there is a fundamental difference because you can sort by price with comparison engines so it is not apples to apples. I did not account for this in my argument. Once again, thanks for your post.
Preston
Comment by admin — October 6, 2005 @ 11:41 am
[…] Now that the minimum bid for content match is just $0.01, I can advertise where I wasn’t advertising before. Google has opened up a market that they had eliminated due to the previous high cost of content match advertising. In other words, they have eliminated the price floor and advertising willing to advertise at a lower cost can advertise on publishers’ sites that are willing to rent their space for less. My friend Preston does a good job expaining this economic principle in his blog. […]
Pingback by Cameron’s Blog » Blog Archive » Google Finally Gets in Right on Content Match — November 28, 2005 @ 11:48 pm
[…] 2. No More Price Floors. Preston Wily brought this up months ago, and I think the shopping comparison engines will eventually move in this direction. It’s absurd that there are price floors (minimum bid amounts) on the engines. YSM and Google Adwords have proven that market forces will naturally create a semi-efficient market (I say semi because there are way too many companies which don’t track their online advertising spend which leads to bubble like bids in the short term) and this semi-efficient market would encourage new advertisers to test out the engines (a major complaint from merchants is that the minimum bids are too high - Google and YSM have trained people to start bidding at $0.10). […]
Pingback by ComparisonEngines.com » Blog Archive » Shopping Comparison Wish List - Or Everything I Know I Learned from YSM and Google Adwords — January 5, 2006 @ 2:54 am
[…] Background SewellDirect is based in Provo, UT. I spoke with Preston Wily, VP of Marketing, who wrote a great piece on his blog last year pushing shopping comparison engines to take the Overture road and create a real PPC market place as opposed to using prohibitive price floors. I also followed up with Cameron Gibbs, Marketing Manager at Sewell who is directly responsible for the PPC and comparison engine marketing channels. […]
Pingback by ComparisonEngines.com » Blog Archive » Merchant Interview - SewellDirect — March 14, 2006 @ 1:24 pm
Hi Preston-
I agree with David’s main point: there is little correlation between bid price and sales on comparison shopping engines. The brilliance of Google is that they provide very little usable information for users to make an informed purchase decision. You only have two lines of copy to compare one advertiser with another so the user has to click on many ads to find what they want. So the main thing that differentiates advertisers is their position, which is valuable. There’s a built-in scarcity (the top 6 slots) that drives up prices. Good for Google but bad for merchants because their conversion to sale goes down as consumers have to click everywhere to find what they really want.
On shopping comparison sites, users have a lot more information to make a purchase decision: price, merchant reputation, shipping and tax, etc. A merchant’s position in the initial sort order, while relevant, isn’t dominant like on Google. Users quickly resort the merchant list on what matters to them. But because of these features, the quality of the click coming from a shopping comparison site is generally much higher than one from Google.
That’s why shopping comparison engines need price floors. If there were none, merchants would all just bid $0.01 per click because they’ll quickly figure out that bidding $0.05 doesn’t buy you 5x the ROI.
Comment by Joe — March 14, 2006 @ 3:53 pm
[…] It’s been a while since I wrote a post about comparison engines but I can’t believe the issue that we’ve had with Shopping.com recently. In our industry (computer hardware and accessories) it is not very uncommon for two different products to have the same MPN (manufacturer part number). For instance, two manufacturer’s may use the part number 200A for two products that are entirely different. […]
Pingback by The Preston Blog - An internet marketing blog for internet retailers » Can Shopping.com really not figure this out? — September 3, 2006 @ 8:09 pm
MS CRM Customization, Data Conversion & Integration…
The MS CRM Architecture is designed for scalability and customization. Besides the possibility to personalize MS CRM on your own the system it also allows add-ons by self developed components or customization. In order to customize CRM, Microsoft has i…
Trackback by Range Of Data Conversion — February 21, 2008 @ 11:33 am