There’s no such thing as free revenue
Kittens [ads] for sale
If you do a Google search for the word kittens (which I recommend as a periodic palate cleanser after too much internet) you may notice something interesting: there are no ads on the search result page.† Why would that be?
It’s not because Google doesn’t have enough advertising demand — Google is an advertising juggernaut controlling an estimated ~37% of the digital advertising market and they have plenty of partners who would be happy to buy kitten-adjacent advertising. It’s also not because Google’s industry leading ML teams are struggling to know what advertisement is the best for the search query kittens — rather it is because they have decided that the best advertisement in this case is none at all.
Why would Google ever prefer no advertisement (and no revenue) to some advertisement (and some revenue)? Because like any healthy long-term business Google is not seeking to maximize revenue but seeking to maximize profit — i.e. revenue minus costs. Google knows through careful measurement and experimentation that introducing promoted listings into organic results is not cost free — so when the cost of showing ads exceeds the revenue they would generate, they don’t show any at all.
This isn’t just Google, by the way — Facebook does the same thing. To properly tend to the long term health of your business, you will need to determine where to draw this line as well.
† As of now, anyway. Nothing stays pure forever!
The high cost of bad ads
It is easy to agree in principle that we should only show good ads that promote the long term health of our business, but in practice these costs are often quite subtle and difficult to measure. Knowing whether or not to show a promoted listing means balancing between the competing interests of users, partners and the platform itself. Without a sophisticated approach it can be quite challenging to understand the potential risk/reward of a particular promotion — we talked recently about how one naive approach can actually completely backfire.
There are three basic ways that a bad advertisement can damage your business in the long run:
- Lower Growth If users are frustrated by promotions they are more likely to leave and less likely to return, damaging growth, retention and engagement on your platform.
- Lower Engagement If users come to see promotions as unhelpful / distracting, they may come to ignore ads (“ad blindness”) and engage less with partner promotions.
- Lower Demand If partners come to see promotions as ineffective they are more likely to redirect their advertising budget to other competing platforms.
These are slow to emerge effects that can be difficult to detect in a limited time window A/B experiment but can come to dominate the long term prospects of your business so they are critical to understand and account for properly.
In the next post in this series, we’ll talk about all the different aspects to consider when deciding whether or not to show a promotion.
