You May Be Paying Too Much for Your Adwords

All the major search engines like Google, MSN and Yahoo! allow you to purchase sponsored links. You make a bid for certain keywords and the higher your bid, the higher in the list of search results for the keywords your ads appear.

You are in effect participating in an auction where the item traded is your position in a list. Such bidding is in many ways similar to auctions performed in auction houses where everything from antiques, books, cars etc may be traded.

The term “curse of auctions” has been around for some time and concerns the proposition that a buyer at an auction purchases an item for a price exceeding the value of the item because some bidders do not know the real value of the item being traded.

The theory is that if all the bidders for an item know the real value of that item, then the item will be sold at this real value. This is because the bidders will bid until this real value is reached. No one will bid any higher. In order for the bid to reach the real value, at least two bidders must know the real value.

If there is only one bidder who knows the real value and all other bidders estimates the value of the item to be lower than it actually is, then the winning bid may be below the real value of the item. In this case, the bidder makes a good deal since the price paid is below the value of the item.

If however there are bidders who overestimate the value of an item, then these bidders will make bids above the real value of the item. For the bidder who knows the real value, this is a lose-lose situation. If the bidder only bids until the real value of the item is reached, then the bidder will be outbid by the less well informed bidders. This means that the bidder must either not purchase the item or he or she will have to pay a too high price for it. This lose-lose situation is meant by the “curse of auctions”.

In the world of online advertising and sponsored links, the “curse of auctions” may result in the price paid for some keywords to be too high. If you participate in such an auction and bid against novices who are not well informed, then your choice may well be to either not win the auction or pay a price you know is too high.

The above description is a simplified version of the world of bidding for keywords for sponsored links. The primary reason for this is that different keywords have different values for different websites. Amongst other factors, this value depends on the revenue generated per click on the sponsored this. And this revenue obviously depends on the quality of what website to which the user is directed when clicking the link.

Bids for certain keywords vary very much from search engine to search engine. Generally speaking, Google is the most expensive. MSN, Yahoo! and smaller search engines often have much lower bids for the same keywords and so can be much more profitable for you. Smaller search engines generate less traffic, but as long as they generate profits for you, they are worth using.

If you are a website administrator and make you of sponsored links, you should determine if what you are bidding for keywords represents a fair value. If not, you should lower your bids.