Adwords, vertical search & aggregator middle men

Many thought the internet would “cut out the middle man” by making it trivial for businesses and customers to find one another. Who’d need a travel agent when you could find a hotel’s website and book direct. The internet equivalent of the high street travel agent are the aggregators e.g. Expedia, Travelocity, Priceline and Booking.com. Unfortunately for the hoteliers and airlines that sell through these aggregators it hasn’t (quite) panned out like that…

Return per click and gross margin per sale

The hoteliers ought to achieve greater revenue per sale by advertising on Google themselves and selling direct to the customer. Remember the aggregators are middle men. The hoteliers and airlines pay the aggregator a percentage commission per sale. Hoteliers achieve greater gross margin per direct sale than the aggregators, they ought to be able to out-bid aggregators in Adwords – right! Wrong. The aggregators achieve a higher return per click than their suppliers despite lower gross margin per sale.

Travel aggregators beat their suppliers to dominate PPC marketing because they typically achieve a higher return per click than their suppliers. A higher return per click means aggregators can afford to spend more per click; their ads appear higher, achieve greater click-through rates and therefore achieve higher volumes. It’s pretty simple, aggregator’s achieve a higher return per click because they have greater range and availability of product. Let’s put that into context and see how it relates to PPC.

How is it possible that the aggregator achieves a higher return per click despite their smaller cut of a sale? Here’s the thing.. good old fashioned choice, that’s how. The customer is often considerably more likely to find what they are looking for on the aggregator’s site. This higher probability of a sale (conversion) is often many times higher than the suppliers. The aggregators’ greater choice and stock more than compensates for a smaller revenue per sale. Conversion dominates over revenue per sale.

The beauty of Google’s Adwords is that both aggregator site and an individual hotelier can reach a relevant audience. For hotels, the primary relevant parameter is location, so both aggregator and hotelier can advertise against searches for “hotels in brighton”, “brighton hotels” etc with relevant ad text and a link through to the relevant page on their websites.

Customer requirements and preferences

Here is a fictitious example. Let’s look at what 1000 people who clicked on our “brighton hotels” adverts are looking for. We look at which price filters these 1000 people use, this tells us their budget per night:

What customers are looking for

What the hotelier has

What the aggregators offer

If we overlay the hotelier’s distribution of available room prices over the distribution of prices customers are looking for, we see that there is a significant mismatch. The 30% of customers looking for a property under £70 are unlikely to book a room; likewise for the 10% looking for premium rooms over £150. That’s 40% of demand the hotelier is very unlikely to fill.

The Aggregator’s distribution of available room prices is a much better fit than the hoteliers. This example tells us nothing about whether the hotelier has sufficient quantity of £70 to £100 rooms to fulfil demand. In the case of the Aggregator it is also more likely they have sufficient rooms across their range of hotels to meet demand. Applying the same technique across over customer requirements and preferences magnifies the Aggregator’s advantage, they are much more likely to have a suitable room available in a hotel that meets the users needs and preferences.

To simplify and illustrate the point, let’s assume that both the hotelier’s website and the Aggregator’s site have identical conversion rates *when a suitable product is available* i.e. the speed, design, usability and error free operation are comparable. Given this demand price distribution above, the Aggregator is significantly more likely to have a *suitable product available*. The hotelier does not have rooms available and priced to meet 40% of demand. In this example the Aggregator may be twice as likely to have a suitably priced room available. If we include other customer requirements and preferences, room type, hotel facilities, hotel location etc, the Aggregator’s advantage over a single hotel compounds, the aggregator is likely to be at least 3 times as likely to make a sale as the hotelier.

Let’s assume the average price of a room booked is £100. For the sake of argument, let’s assume the nominal gross margin for the hotelier is 40%, that’s £40. On average our Aggregator gets 20% commission and after costs their gross margin for comparison is 15%, that’s £15. The return per click is:

Hotelier’s return = £100 * 40% * conversion_hotelier = £40 * conversion_hotelier
Aggregator’s return = £100 * 15% * (3 * conversion_hotelier) = £45 * conversion_hotelier

The 3x conversion advantage due to range of product better meeting customer demand is probably an understatement but illustrates the importance of having the products customers are looking for and its impact on conversion and hence on the CPC an advertiser can afford.

Adwords + vertical search = increased relevance

Adwords does a good job showing relevant adverts based on keywords. However, customers searching using Google’s normal text box search typically only specify a couple of their preferences. For example, “brighton hotels” says the customer wants #1 hotels and #2 hotels in Brighton. What if Google, for searches mentioning ‘hotel’, showed price and room type filters and extended Adwords to support CPC bidding against price ranges and room types as well as keywords?

Hoteliers could afford to spend more per click where they are confident the customer is looking for a type of room they can provide at the right price, their conversion and return per click would improve, enabling them to spend more per click for this smaller volume of more relevant searches.

What happens to aggregators in such a scenario? Aggregators would still be able to confidently advertise against these searches, their conversion would remain the same. However, hoteliers would be better able to compete on CPC, achieve higher positions and volumes.

Increasing advertiser diversity whilst improving customer relevancy would surely be a good thing for the both the customer and Google. Obviously such a vertical search could be taken further, but a model like this may be palatable for the aggregators – Google’s existing big Adwords spenders.

Related: The ultimate aggregator – Google, Travel, Vertical Search and Mobile

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