Search Engine Ranking Is A Measure of Market Leadership

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search2_small.jpgADOTAS — On Tuesday, August 18 Google’s Chief Economist, Hal Varian, declared that “conversion rates don’t vary much by position.”

The conversion rate is the ratio to which users who click on ads in search engine marketing campaigns are converted to paying customers. Many media sources (incorrectly) extrapolated this relationship and concluded that this means search engine rankings do not matter for online marketing professionals. Nothing could be further from the truth.

Yet Google is probably correct in determining that the conversion rate is similar across search engine positions. Remember that the conversion rate is impacted by an enormous number of variables ranging from the ad relevancy, quality of traffic, website usability, the number of payment methods accepted, clarity of the checkout process, relevant content and brand identity.

The most important variables for measuring conversion include measuring time spent on the site and the individual pages through which users enter and exit. Time spent on a website is a factor of ad relevancy as well as clearly understandable content. The individual pages on a website point to type of information visitors are seeking. Many marketers take this analysis one step further by heat-mapping both clicks and mouse hover times. Thankfully, most of this information can be easily obtained from most website analytics packages including Google’s own Google Analytics. Thus the responsibility to convert visitors into buyers depends on both your ad campaigns and your website.

So if conversion rates are relatively static and Google is correct, then why do search engine positions actually matter? Simply put, search engine positions matter because of volume. A software merchant on the UpClick payment platform, who shall remain anonymous, was gracious enough to provide us with raw data across all pay-per-click campaigns on Google over a 30-day period. The data provided breaks down costs, clicks and conversion rates for campaigns organized by keyword position. We then boiled down this data and sought to understand the relationship between cost-per-click, conversion rates and overall clicks. Our conclusion will help online marketers develop strategies suitable to their level of sophistication.

While the merchant did not divulge the actual conversion percentages, we have an indication of comparative conversion between the three positions in the competitive software vertical. At first sight, the relatively higher conversion for position #2 seems like an anomaly given Google’s commentary.

The merchant explained that software utility sales are extremely price sensitive and thus online consumers tend to shop around extensively. Conversion was therefore highest in position #2 if products were priced at a discount relative to position #1. This is especially true given that the particular merchant was up against much larger and better known competitors who always dominated the first position on the most popular keyword terms.

Take a look at the summary table below.

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The most interesting statistic is the difference in traffic volume between position #1 and #2. Position #1 receives more than four times as much traffic compared to the second position! Also notice that the cost-per-click falls between the first and the second position. This is because users will naturally tend to click on the first ad position and Google will reward you for better click-through rates with lower advertising fees.

Once we found a significant discrepancy between the first 3 positions, we wondered what traffic patterns looked like for positions #1-10. Our results have been graphically displayed below. Interestingly, there is a clear exponential relationship between rank and traffic. Thus even a small change in ad position can result in an exponential growth of visitors! Assuming that overall conversion remains relatively stable, a fact now corroborated by Google, we can see that moving up in search rankings results in market share domination. For our merchant, ads in the first position drove over 50% of total online revenues.

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Our findings and Google’s research leads to two interesting conclusions. The first is that market share domination comes from being placed in the first and second position. If you want to maximize your total online revenues, you need to rank higher on popular keyword terms.

The second conclusion is that only the most sophisticated marketers who have fully optimized all aspects of the buying process can remain profitable in the top positions. There is a significant variance in cost-per-click between positions #3-10 and the first and second position. The reverse of this is also true: marketers who are beginners in online marketing should not strive for the top positions. Marketers need to continuously optimize the buying process to maintain high conversion rates and large basket sizes to justify the cost of bidding on the most expensive positions.

In this merchant’s case, bidding on the top keyword positions was profitable due to several factors. Firstly, the merchant continuously tests landing pages and has a full in-house designer team dedicated to the endeavor. Secondly, the merchant minimized processing fees and maintained good conversions by using an optimized checkout process. Lastly, we worked closely with the merchant and significantly boosted average basket size by cross-selling complementary third-party products from the UpClick marketplace.

So why is dominating paid search so important for online marketing professionals? Google represents almost 60% of the US online advertising market according to the major research firms. Traditional methods for advertisement such as radio, TV, newspapers and magazines are delivering a lower and lower return-on-investment. Thus many companies are being forced to go online or face bleak growth prospects. Understanding that search marketing is a continuous process that requires a multi-disciplinary skill set is the first step to succeeding online!

5 COMMENTS

  1. I am afraid Daniel is just plain wrong here. Ad position is not important to click-through rate or conversions, the text on the ad is what counts. He has researched only 1 site over a short period of time, whereas I researched this over a 5-year period across a range of sites, covering multiple sectors. This eliminates biases specific to individual sites or sectors, a problem Daniel had in his research above. My conclusions are detailed in my article on this in iMedia at http://www.imediaconnection.com//content//12991.asp.
    Position mattered in the early days when web users were naive. They wised up years ago. Ad design is what matters, not position.

  2. Your study accords with what we know from heat maps. Positions matter — a lot — because being #1 delivers far more volume than lower positions. Whether one can afford to be #1 is another matter, of course, and this is where all the hard work of optimizing the conversion chain comes into play.

  3. @ Brandt I think you may have misread the article – Daniel agrees that conversion rates remain relatively static across ad positions. If anything, he also agrees that position #2 having a higher conversion rate is most likely an anomaly.

    @ Steve Agreed completely. The key question is are you optimized enough to be #1?

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