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Since Google is really smart what they now introduce is a concept known as "smart pricing". Google really doesn't want to lose the good publisher to a competitor as we have seen they've become a real money earner for Google. So that this doesn't happen they "smart price" the traffic up and they could pay the good publisher $2 per click. This is double what Google themselves are paid! As we will soon see what they pay the good clicks is almost irrelevant. It's the bad clicks where they make their money.
What they also want to do is punish the bad clicks (as there are lots of those available) so they "smart price" them downwards and pay only $0.10 per click.
The result is that Google still earns $100 from the advertisers but now they payout $20 (ie. 10 clicks x $2 per click) to the good publisher and $9 (ie. 90 clicks x $0.10 per click) to the bad publishers. Miraculously Google now only has to payout just $29 and therefore earn $71 (ie. $100 - $29) for their efforts. This is a windfall of $90 - $29 or in other words "smart pricing" just added $61 to the bottom line!
What's even better about this is that the good and bad traffic publishers are patting themselves on the back. They are both saying, "it's really what my traffic deserves". The advertisers are also happy because they've done their maths and worked out that the current conversion rates warrant paying $1 per click.
The best part about this is that Google is able to launder a lot of bad traffic with good traffic and make it all pay the same while they themselves can discriminate on what they pay out. This is a great business model! What's even better is the lack of transparency in the whole process means that they are accountable to no one.
Let's put this into context. Google receives money from advertisers and then pays out whatever it really wants because of its "smart pricing" system. Let's imagine that you're a domain parking company and you've just negotiated your contract with Google to receive 88.4% (the average payout rate for the Google network) of the advertising dollars that are paid to Google.
As I understand it Google always has a clause that allows them to "smart price" the traffic therefore how can a parking company be assured of the 88.4%? Unless they are able to audit Google then they can't ever be assured of their share of the revenue. I know of no parking company with a Google feed that has ever audited Google to ensure that they are being paid correctly. I do know of some parking companies that have a right to audit but do not invoke that right due to fear of retribution from Google.
This is extraordinary behaviour considering that Google produced a paper that indicated domain traffic was twice as effective as search traffic. Given the above calculations this means that domain traffic should be paid not 88.4% of the advertising revenue but closer to 300-400% due to Google's ability to dilute the traffic with lower converting clicks. The problem is that the parking companies will never actually know how good they convert and what percentage they are actually being paid.
This is where the parking companies need to "out Google", Google and dig into the numbers to find the true value of their clicks. Part 4 will tackle the importance of Google analytics and why it has been released as a free service and how parking companies have the ability to strike back against the upstream advertising aggregators.
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- May 12, 2008