Traffic Acquisition Costs Growing

It seems that TAC (Traffic Acquisition Costs) for Overture (now part of Yahoo!) has been growing steadily due to increased competition in the market. This comes from an article about the release of Yahoo!’s new numbers, the first time with Overture included. The market we are talking about here is that of paid placement text links. Where did all this come from?

It started out with goto.com, now Overture, which had a paid search engine, with the idea that if somebody paid well for a given term, it would also be interesting for the user. Still, the site remained relatively small, unteil they decide to just place their top 3 search results on top of standard search results on other search engines, like Yahoo!, giving part of the revenue earned to those search engines. This was kind of the start of TAC. Then Google came and started (after Sponsored Listings which I will leave out) AdWords, which puts these ads (which they now are) to the right of their search results to make sure that they are seen as a seperate thing. They are still working wonderfully, especially because Google has a lot of traffic.

Then the hype started and Overture, Google, eSpotting, Find What, Kanoodle, … now have huge numbers of advertisers and they need to acquire more and more traffic to get a high number of clicks on the ads, which should in the end turn into sales for the advertiser. But search only produces that much traffic. This is where it turned out that you could start something is called contextual ads. There are different approaches here. One would be, used by Google, to read a web site automatically and then find an allgorithm to decide what the page is about, then displaying ads on it as if users searched for what the page is about. This is reasonable ok and still relatively content targetted, even though the user is not longer in “search mode”, which increases conversion, arguably. What others do, is simply decide what the page is about and then put links on there in relation to the keyword that was decided for that page.

Suddenly their reach grew immensely and you will now see Google banners all over the net, even possibly making Google one of the biggest advertisers on the internet (more here). The reach is immense, but they need more. Google now has over 150.000 Advertisers and they all want lots of (good) traffic. So everyone wants to be on the good sites (Google now even bought Sprinks, arguably to get in About.com).

To get their placements in those sites, the good ones, they pay out % of their revenues, in different kinds of ways and this is why the TAC grows, and their margin will think to almost nothing, unless somebody is considerably better at optimizing the ads than somebody else. And then the question comes in what optimization is, for clicks or for sales? For the advertiser it’s sales but for the likes of Google and Overture it’s clicks. And this is where the quality question comes in. :)