Ed Robinson

Writer, Capital Ideas, Chicago Booth

Paid internet search ads, also known as search-engine marketing (SEM), dominate online advertising. According to the latest figures available, advertisers spent $18.4 billion on paid search ads in 2013, or 43 percent of total US internet advertising revenue.

But many of those ad dollars being spent by well-known companies may be going to waste. A study of SEM’s impact suggests that while it might help bring in some new or infrequent customers, it doesn’t appear to have much impact on another important audience: frequent internet users seeking well-known brands.

“For a site’s regular shoppers, SEM does not have a significant effect on their purchasing behavior,” write Chicago Booth’s Chris Nosko, Thomas Blake of eBay’s research labs, and University of California, Berkeley’s Steven Tadelis. Their findings indicate that much of the money being spent on SEM may be wasted on buyers who would have made the same purchases through other means rather than paid search advertising.

The researchers set up a series of experiments to study the effects of eBay’s SEM on revenues. In one experiment, eBay halted advertising alongside brand-related searches on the Yahoo and MSN search engines. The results reveal that for people whose searches included the term “eBay,” the ads for eBay had almost no effect—99.5 percent of the traffic that would have come to the site via the ads ended up there anyway.

“Shutting off paid search ads closed one (costly) path to a company’s website but diverted traffic to natural search, which is free to the advertiser,” the researchers write.

But there are more than 100 million keywords that will trigger paid search ads, so in another experiment, eBay suspended paid search ads in 30 percent of US markets for 60 days. The researchers find that people making nonbrand-specific searches were only slightly more receptive to SEM. Paid search ads appeared to increase those people’s purchases by a statistically insignificant 0.66 percent.
Paid search ads did have some effect: they worked on people who hadn’t made recent purchases on eBay. People who made purchases after absences of 30 to 60 days rarely clicked on search ads, but the click-through rate rose for each month after that 60-day horizon, to the point that ad-influenced purchases became statistically significant.

And paid search ads had their biggest impact on first-time eBay buyers. The more users made purchases on the site, however, the less the impact: the statistical significance was close to zero for regular buyers.
“The experiment showed that the effectiveness of SEM is small for a well-known company like eBay and that the channel has been ineffective on average,” they write. “We find however, a significant positive effect of user search engine marketing on new user acquisition and in influencing purchases by new and less-frequent users.”

(The article was originally published on the Capital Ideas website: www.ChicagoBooth.edu/capideas; Connect with Capital Ideas on Facebook – www.facebook.com/BoothCapIdeas, Twitter – @BoothCapIdeas and YouTube – www.youtube.com/user/BoothThinking; Retail & Business is India’s leading retail publication)