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The best $100 Google never spent

Since my last real post was about something Google was doing very wrong, let me now offer an example of something they're doing very right: ads. Back in September, my company was sent a letter with a $100 credit from Google that essentially said "Hey, small business owner, here's some money to give AdWords a try!" Now while $100 isn't much in the grand scheme of things when running a business, it's also true that nobody else has done anything similar, so it was attention-grabbing enough to see what all the fuss was about.

I won't go into all the details of what AdWords is all about. Suffice it to say that it doesn't really fit in with our main business of software consulting. We do custom development, which isn't a consumer-level product, and what software we do offer to regular users is more of a freebie in nature. So what we decided to try to burn the bucks on was our Mac software update tracker. We set things up a couple weeks ago as an experiment, and it's proven to be interesting.

At the time we created our ads, the keywords we targeted were going for $.09-.13/click. Since we had no idea what the response was going to be (for all we knew, the $100 test money could have been sucked up almost immediately), we put a cap on our ads of $.10/click. The interesting part is that, initially, we saw a fair number of impressions. Then after a couple days, the impressions stopped.

That was when it struck me how smart it was for Google to hand out $100 like it was nothing. Initially, all I thought about it is that yes it was nice, but that all it represented to them was some marginal cost to run my ads "worth" $100. They actually only lose a few bucks in costs, traded against the future income they'd make if I keep running ads after the $100 is spent. It's smarter than that, though, as my first few days showed.

What my ads did was drive up the bidding for everyone using the same keywords. So what happened is that I came in with $.10 ads that started stealing impressions from established, paying AdWords customers that probably were getting better click-throughs for $.09 before. So without Google having to do anything, those people were pushed to start paying $.11 (or whatever it takes to get them ahead). What could I do to get my impressions back but up my own offers? I'm currently trying out $.15/click.

As you see, it quickly becomes an arms race that Google ends up winning. Sure they gifted me with $100 credit, but it's proving tough to spend. And while I'm spending it, everyone else in the system is spending more. What initially seemed like a loss-leader of $5 or $20 for Google is probably profiting them many times over the $100 they give away. It's a very clever play, and I'm going to think long and hard about how to use similar mechanisms in some of the social networking development I'm doing.

Update: I am now up to $.30/click, and I doubt that's going to be the end of it.