What Google’s Q1 2017 Earnings Report means for the retail sector

- Luke Metcalfe

Yesterday, Google’s parent company Alphabet released their earnings report for the close of Q1 2017.

As we predicted, Alphabet’s revenues rose 17% between 1Q16 and 1Q17.  Much of that revenue boost is likely due to the 53% rise in clicks on paid advertising – no surprises there. What’s odd is that while both revenue and clicks went up, cost per clicks went down by 19%.

For those of you who paid attention in Econ101, you’re probably wondering how that’s possible. How can Google receive less revenue, but still make more profit?

Google claims that they have “refined their methodology for paid clicks and cost per click to include additional categories of TrueView engagement ads and exclude non-engagement based trial ad formats.”

But we think the answer is slightly more nuanced than that.

More ad inventory

First off, the sheer number of ads Google shows on a search results page has increased. Ads, most notably of the Shopping variety, have popped up in image searches, YouTube and even Gmail.

This “ad creep” has pushed organic results further and further down the page. In these two screenshots, for example, organic results didn’t even make it above the fold at all. Considering that Google is now reporting that 51% of all clicks are coming from Mobile devices, the lack of organic results means that advertising is particularly taking over the majority of the mobile SERP.

A large part of this creep is due to the growth of visually-oriented Shopping ads, where the image of the product is presented instead of the traditional three lines of text.  Sometimes known as PLAs, not only did this ad format increase the raw number of ads a searcher was presented with, it also increased the amount of space ads took up on the page – by a lot.

See, the reason that Shopping ads are so powerful is that they include an image of the product. And images take up a lot more vertical space than text.  

So if desktop SERPs contain 5 – 9 Shopping ads and 2 – 4 Text ads, your average human now has to scroll quite far down the page in order to click something that isn’t an ad. A task which becomes even more difficult when using a small phone screen – an important factor when you consider Mobile now accounts for the majority of online ad clicks.

More ads that take up more space means two things:

  1. Searchers are more likely to click on ads (equals more revenue for Google)
  2. There are more ads for companies to buy (increased supply initially leads to lower prices while demand catches up)

Visually oriented product ads

Secondly, the move towards Google Shopping Ads has traditionally lead to an increase in clicks in total. In their report Alphabet doesn’t differentiate the number of clicks generated by Shopping vs Search ads, but overall clicks on Google’s web properties (search, Gmail, and YouTube, etc) grew 53% from 2016 to 2017.

That means that Google is getting higher click through rates on existing space, because it can place three product ads in the same space as a single text ad, and consumers are more likely to click on image-based ads than text-based ones. According to our own research Shopping ads now represent around 74% of all ads clicked on Google.

Google_Shopping_Click_Share_2014_2016

This growth is also likely due to Google serving more product ads and expanding their availability to more general search terms — for example, showing Shopping ads on a search for “running shoes,” not just “Nike Air Max.”

In addition, Shopping ads have proved highly effective. Jessica Levens, director of e-commerce at Reef (a beachwear brand), recently said in the NY Times that “product campaigns helped triple sales that started from online queries, including instances where customers searched without including the Reef brand name.”

Our research also shows that Shopping ads are more likely to lead to a sale, making them a more profitable advertising medium. This is particularly impressive considering that in a side-by-side comparison, Shopping ads are actually more expensive than Text ads.

It’s no surprise then that retailers are snapping up them up. Shopping ads accounted for 52% of all Google search ad spending by retailers in the first quarter of 2017.

The important takeaways from this quarter’s Earnings Report are that

  1. Google has prioritized use of an ad medium (Shopping) that people click on a lot (More click revenue for Google)
  2. Google has used Shopping as a way to expand the number of available ads for retailers to buy (more ad selling opportunities for Google and lower prices while demand catches up to supply)
  3. Shopping has become an advertising medium that retailers can’t live without (always good for Google)

Everyone’s a winner (for now)

It seems all that traffic pushing and ad reshuffling is really working in Google’s favor.

In Google Shopping, Alphabet has created an advertising medium that works on multiple levels.  It’s good for consumers because they can easily find the product they are looking for, and it’s good for retailers who are getting a better CR and ROI than they were with Text ads.

What’s more, this ad medium is working on Mobile, which is a big deal considering it now equates to more than half of online traffic.

The real winners, as always, are Google. They’ve created a system where even though the cost of their product has more than halved in a year, they are selling enough of it to still make money.

What does this mean for advertisers?

Right now, Google Shopping is the deal of the century. Due to the ongoing availability of ad inventory supply, its costs are at an all-time low while the CR remains high.

This will not last forever! As more retailers recognize Google Shopping as a way of converting mobile traffic and improving the digital marketing ROI, they will invest more advertising money and CPCs will rise.

That means this is the best time to start investing in Google Shopping. Costs are relatively low, returns are high and competition is minimal. As a retailer if you can work out your Shopping strategy now, you’ll be in excellent shape when the rest of them catch on.

ABOUT THE AUTHOR


Luke is a Content Marketer at Crealytics

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