How Google Uses Coupons To Increase Its Profits

Posted by Giorgio Tomassetti on 18:07
In this post I will explain how Google is one of the few companies in the world who can directly profit from giving out free coupons for its advertising program.

Google receives most of his revenue through the sale of advertising. In particular, Google is able to automatically match the needs of advertisers with relevant online content. Ads are placed on the search engine pages, as well as in third party websites through the AdSense Program.

How Google Advertising Program Works 
What is really interesting in my opinion is how the system works, especially on the advertiser's side.

If you want to promote your website/product online, Google AdWords (the program set up by Google for its advertisers) is probably your best choice right now. The system is very efficient because your ads will be placed in areas related to the subject of your interest and you will pay only when people click on your ad. For instance, if I have a blog in which I write about cars I can ask Google to place ads on my blog. The ads that Google will display on my pages are very likely to be about cars. When my visitors click on the ad, Google will split the revenue with me (AdSense Program).

Each time a visitor enters a page in which Google places ads, an auction takes place. Indeed, each advertiser has previously entered his preferences regarding his willingness to pay for certain results. For instance, I could decide to bet a  max of 8 cents for a certain ad to appear in a certain context. Now let's imagine that there are other four advertisers betting 10, 11,10,15 cents for my same results. Usually Google ads show a max of four advertisers at the same time. If I am betting 8 cents and everyone else (4 players) is betting more than me, I will not enter the advertising space for that page. In order to appear in that page, I would have to raise my bet. In other words, Google ads are governed by auctions that run each time a page is opened. (In this explanation I made things a little easier just to give a gist of how the whole system works, but if you sign up to AdWords you can see yourself how sophisticated the system actually is)

Usually, in auctions, the following is true: the higher the demand, the higher the final price. In other words, if more people are betting for the same result, the price is likely to increase (also because Google tells you when you set up your campaign what the price for your bet should be based on current bets). If you want your ad to show up, you need to bet more. 

The Impact Of Coupons
In the last few years I have received several letters from Google with coupons inside. The coupons were always very generous if you consider the price of the average bets. I would receive 50 €, 75 € and 100 € coupons and I would only spend a few cents for each click.

One day I started thinking about this generous coupons and I came up with the following conclusion: Google increases its profits by giving out free coupons. 
Why do I think that? Well, as I was saying before, in an auction, if you increase the number of people who want to bet for the same result, you are very likely to have a higher final price. Since coupons allows people to bet more than they would normally do, overall demand increases, the final price per click increases (even if the people who use the coupon don't win the auction) which ultimately increase Google's revenue per click.

This is basically why Google is one of the few companies in the world who can directly profit from giving out free coupons for its advertising program.



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