Key Concept

Spending on search advertising has skyrocketed in recent years. But experiments conducted by researchers from UC Berkeley, the University of Chicago and eBay Research Labs suggest paid search may not be as effective as is thought. Particularly in the case of well-known brands, it seems it has little or no effect on sales as, in its absence, loyal customers will find other channels to visit the company’s website anyway.

Idea Summary

Traditional advertising has always been one of the largest expenditures for organizations; take Procter & Gamble for example, which reportedly spent just under $2.95 billion on advertising in 2011 alone. In recent years a significant amount of this expenditure has shifted to internet advertising which has witnessed massive growth. Of the different forms of internet advertising, paid search advertising — also known as search engine marketing (SEM) — has been the most popular, with 95% of Google’s revenues in 2012 coming from this alone. Clearly, companies are investing heavily in SEM campaigns, so it may surprise them to learn that the majority of paid search advertisements do not actually contribute to an increase in sales; even where they do, the sales benefits are far eclipsed by the cost of the advertisements themselves. In other words, you may not be getting your money’s worth.

These are the thoughts put forward by Haas School of Business’s Steven Tadelis, in a study conducted alongside Thomas Blake and Chris Nosko. Based on the results of controlled experiments, they suggest that when you turn off paid advertising for a well-known brand (like eBay), almost all of the traffic that comes through the paid search is just substituted by other free channels. “If advertising is indeed a strong driver of sales, we should have seen sales plummet," says Tadelis. "But the impact on sales was indistinguishable and not significantly different than zero.” 

Their findings suggest that the efficacy of SEM for well-known brands is limited at best; they acknowledge that this may not be true for small and new entities that have no brand recognition.

Methodology: For 60 days, Tadelis et al turned off eBay’s paid search advertising in certain areas in the US, so that if consumers searched for a keyword from these areas, they would only see generic (free) results at the top of their list. They would, however, still be able to see eBay’s competitors’ advertisements who had bid for the same keywords. When the researchers compared eBay sales in both areas (where SEM had and had not been turned off), they found no measurable difference.

In a second experiment the researchers eliminated eBay’s paid keyword searches throughout the country; they then compared sales for that period to an equivalent period with paid search left on. Once again, the impact on sales was found to be negligible..

Business Application

Considering well-known companies invest large amounts of money in SEM, the implications of this study are noteworthy. As the researchers demonstrate, paid brand advertisements sit just above generic search results for the same term; for example, a search for ‘Amazon’ shows a free search result for the company right below its paid advertisement.  And Tadelis et al’s findings show that the paid search result adds no additional benefit to the advertiser. “It is not that clicking on [the result] causes engagement,” says Tadelis, “it’s that the intent to engage causes people to click on it.”

In many cases, the consumers who choose to click on ads are loyal customers or otherwise already informed about the company’s product. Though advertising may appear to the company as attracting these consumers, in reality it is likely they would have found other channels to visit the company’s website anyway.

The advice for well-known companies is to consider conducting some experimental research to better measure the impact of paid search traffic on their sales, before investing heavily in this type of advertising.