Every now and again we compare the cost and competition of using Google Adwords across three key markets, Australia, the UK and the US. You can see all our working here. Back in September 2010 we selected 91 keywords based on a range of suggestions, across a range of markets including cleaning, seo, web design, mobile phones, lawyers etc. We can then take the average cost of those keywords and first see if there has been any noticeable shift in the cost of advertising, and second to see if there has been any change to the algorithm Google uses to calculate advertiser’s CPC.
Generally, the CPC for each keyword is calculated as a function of advertiser’s bid, quality score and competition. We can assume that things like quality score will be averaged out across advertisers, bid and competition are connected (the more advertisers bid, the more the competition) then the ratio of CPC to Competition should remain relatively the same. If more advertisers are bidding, there is an increased competition, and the average CPC should rise at a similar rate, and fall at a similar rate.
You can see from the graph above that over the last year and a half, the average CPC for advertisers has fluctuated. We have covered several times in the past these changes. In the last 6 months, the cost of advertising on Google has plateaued, although when you normalise this against competition, as you can see below, the cost has actually fallen.
This means that there has been an increase in competition across the three markets that is proportionally greater than the increase in the cost of advertising. There are a few explanations for this;
- Advertisers have increased their quality score, or Google has changed the calculation
- Advertisers are willing to bid a lot less for each keyword
- Google has another, unspoken, component of the calculation, possibly called “Make More Profit For Google”
As we are looking at the average of a range of keywords with many competitors, the top two explanations are plausible, but unlikely. It is generally not expected that the majority of advertisers in any market would either decrease their bid for keywords, or increase the quality of their advertising. As there is expected to be new entrants into a market every month, the quality score should average out, and the bids should fluctuate relative to the position advertisers are willing to maintain.
Obviously there are possible flaws in our data, and our assumptions, but the general idea should remain solid.
As you can see, the UK and Australia are winners, again, as their average CPC has fallen over the last 6 months, and across the last year and a half.