Before you read the rest of this post, go to Google and try searching for “Amazon.” You’ll probably notice that the top two listings are both for Amazon’s website, with the first appearing on a light beige background. If you click on the first — a paid search ad — Amazon will pay Google for attracting your business. If you click on the second, Amazon gets your business but Google gets nothing. Try “Macys,” “Walgreens,” and “Sports Authority” — you’ll see the same thing.
If you search for eBay, though, you’ll find only a single listing — an unpaid one. Odds are, after marketers at Amazon, Walgreens and elsewhere catch wind of a preliminary study released on Friday, their search listings will start to look a lot more like eBay’s. The study — by eBay Research Labs economists Thomas Blake, Chris Nosko, and Steve Tadelis — analyzed eBay sales after shutting down purchases of search ads on Google and elsewhere, while maintaining a control set of regions where search ads continued unchanged. Their findings suggest that many paid ads generate virtually no increase in sales, and even for ones that do, the sales benefits are far eclipsed by the cost of the ads themselves.
Companies spend enormous sums on marketing their products. Yet it’s notoriously difficult to measure the impact of ad expenditures. Companies advertise heavily at times when they hope to sell a lot — like Christmas Eve and Boxing Day — and in areas where they expect to see their sales grow. So a naïve examination of the relationship between ad expenditures and revenues will of course find they move in sync, even if customers don’t pay the ads any mind.
Advertising has also traditionally produced a lot of waste — I see ads for Brioni suits when I open up the morning paper, even though the last time I wore a suit was on my wedding day. The study’s authors quote 19th century retailer John Wannamaker: “I know half the money I spend on advertising is wasted, but I can never find out which half.”
The internet promised to change all that. Google, Yahoo, Bing, and others gave sellers the opportunity to target their pitches to
