23.07.2012

New Google Shopping: Striking Business Shift For The Comparison Ecosystem? (PART 2)

With the new Google Shopping merchants have to consider unexpected costs in their business case as the formerly free of charge Google Product Search has ceased to exist. A simple calculation with typical marketing budget allocation to the major comparison search engines and Google Product Search shows the impact from a merchant’s perspective. Looking at the cpcstrategy’s sample (with approximate figures) Google Product Search returned about 20% of the total revenue. The fact that this return comes with no money spent has reduced the total Cost of Sale (COS) of the whole segment to 18%. That means that the other comparison search engines had less pressure to provide competitive performance so far. The calculation below shows how merchants’ spendings would result in a higher COS (22% = lower performance) without Google Product Search.

The question is now: How much should the COS improve in order to compensate the free Google Product Search traffic? We will assume that the new Google Shopping will settle down to the previous market average of 18% which obviously worked for the merchants. Under these circumstances all the other price comparison players will be under pressure to achieve that same performance level.
The merchants calculation: After having spent money for Google Shopping every additional channel with lower performance reduces the total ROI. However by adding some of the lower performing channels the margin (in absolute terms) will rise while adding other channels might eventually generate losses. Nextag and Amazon would have to improve by 10% to deliver full value for the money. On the other side Shopzilla and Pronto would have to do much more to catch up (33% improvement needed).

Consequences:

1. Drop out marketing channels VERSUS lowering prices on the sourcing side

One of the main principles for a merchant is to buy for the lowest price possible on the sourcing side and then sell to the public on a market price level. In order to buy low the merchant needs to sell in high volumes. When marketing costs go up – and this is what happens now - then a merchant typically would compensate it by buying goods even cheaper than before.
Obviously a merchant should drop out marketing channels that produce losses (negative ROI). But this depends on how much the sales go down. Simply dropping out channels could just conflict with the needed volumes on the buy side.
More realistic is that merchants will monitor more closely how products perform and then eventually drop low performing categories from a marketing channel. If this conflicts with the volumes needed it might even drop complete products from the own catalogue. So watch out for more clearance sales of specific products in the coming months!

2. Renegotiation of CPC’s

Merchants with negotiating power will approach channels that are unable to increase the performance. They will demand lower CPC’s or better traffic quality. For the services that offer bid options for certain products the merchants will redefine the rules. There will be products that will be pushed up and others that are not regarded as competitive products will disappear from the bid list.

3. Deeper engagement with Google Shopping and Product Listing Ads

Merchants will have to understand the interdependecies between the Product Listing Ads (PLA) and their SEA + SEO. This leads to interesting challenges for the bid management. They will have to monitor how clicks for certain products develop and asses the synergies between them. Other aspects are competitors search results and cannibalization between duplicates.
If the organic search results loose performance due to the prominence of PLAs, the SEO measures must be strengthened. In any such case, this would weaken the merchant’s business case and would make all the consequence listed here more important.

4. Be innovative!

Many merchants regard comparison search engines rather as lead generation tools. That’s why they accept in some cases Cost of Sale figures far beyond 30% maybe even in the hundreds. The calculation is that customer retention activities generate enough return. Now it is even more important to make sure that customers come back and buy more often. A good reputation and a well performing customer service is the key. Social media offers the best opportunity to engage with the user. For those who understand the metrics and are aware of the context – retention, reputation, customer service - social media will help to build lasting and profitable customer relationships.


* Improved COS means actually, that the rate has reduced.

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