Google Adwords Vouchers – Distorting the Market?

Thu, Oct 21, 2010

Opinion

Many of you will be familiar with Google’s practice of giving out millions of dollars worth of Adwords promotional vouchers, some with individual values of up to $300. The obvious question this practice raises is “What effect does this practice have on the Adwords economy?”

Economists generally agree that high rates of inflation and hyperinflation are caused by excessive growth of the money supply. Google releasing millions of dollars worth of coupons is much the same, conceptually, as a government printing money backed by nothing (see also: The Weimar Republic, Zimbabwe). It causes inflation to occur and the value of everyone’s ‘dollar’ to diminish. The inflation caused by Google’s injection of what amounts to millions of dollars of “free money” into the Adwords economy predictably has an inflationary effect on bid prices. Why? Because by and large the holders of vouchers bid without really caring about what they’re doing–it’s all free money anyways; there’s no risk of loss.

They’ve also created a thriving secondary market for the vouchers. Just take a look at these Google Adwords voucher listings on eBay. We’ve also heard of people running scams whereby vouchers combined with disposable credit cards are used to purchase thousands of dollars worth of nearly-free advertising.

So why does Google do it? They do it to recruit new advertisers, which in turn creates more competition for terms, thus artificially pushing up bid prices. Google banks on a small percentage of the people who create new Adwords accounts using the vouchers retaining the accounts after the voucher money has been used up, and continuing to purchase Adwords advertising from Google.

The winners in this scenario are clearly the voucher-users (free money) and Google (new advertisers). The losers are the old advertisers, who are getting their bid costs ramped up by people for whom there is zero real cost to their purchase.

A similar problem once existed on eBay because they gave away so much free credit for their banner ads–$50 per new account to spend on banners. The consequence of this was that nobody ever bought “real” ads–it was always too expensive to bid on them. all the ‘free money’ in the system made bids on advertising space beyond the capacity of people looking for ROI.

People defending Google’s behaviour might say that, for example, what’s wrong with a restaurant owner giving away free desserts or a software developer giving free apps to certain people? Google is a private company and has the responsibility (within the law) to do whatever it thinks is best for Google’s business. If this makes bidding too expensive for advertisers, well, don’t buy any more ads? The problem with this argument is that Google’s actions are alienating their advertisers’ goodwill. When 95%+ of your income is conditional on your advertisers’ goodwill it seems like something Google should be making more of an effort to cultivate.

Not wanting to have this article seem to be a Google beat-up, we contacted Google’s press department and put the following question to them:

“What provision has Google made with its voucher program to ensure that its current advertisers are not disadvantaged by the injection of “free money” into the Adwords economy? Specifically, to insure that bid prices are not artificially inflated by people who are paying for ads with vouchers, and therefore have no particular incentive to constrain their bids for ROI or other, related reasons.”

Their spokesperson replied:

“We have many efforts in place to reach out to businesses that haven’t yet discovered that online advertising can be a powerful, measurable and cost-effective way for them to find customers. From time to time, we offer promotional coupons to new AdWords advertisers through various means, including via email, U.S. mail, industry events, etc. Anyone who needs assistance is able to contact us through our AdWords Help Center.”

Which I think you’ll agree is so non-responsive as to not even qualify as a “dodge”.

What do you all think? Is Google’s “print money” approach completely legitimate and fair to current Adwords advertisers? Do you think it’ll pay off for Google in the long term? Most importantly, is it at odds with Google’s professed philosophy of “not being evil”? Look forward to your comments.

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