• by Tom Hespos , August 2, 2005

In many ways, buying behavior in paid search resembles the irrational exuberance of online ad buying in the mid- to late-1990s. Something is so frustrating about that.

You remember the CEO who insisted, relevant to his business or not, that full-page ads run in The Wall Street Journal on the day of his dot-com product launch? You'll also remember the online marketing director who insisted on home page ads on all the portal sites, targeting be damned. While a good deal of this was driven by the desire for stratospheric stock prices, a good deal of it was contributed to by ego or other emotional drivers. And now we're in 2005 - same irrational drivers, same erratic behavior, different channel.

The channel to which I'm referring, of course, is paid search. Search is still red hot, but advertising within the realm of search is often characterized by the kind of thinking that makes normally smart business people do exceptionally dumb things. Case in point, the proliferation of the "No. 1 listings at all cost" buying tactic. Such reckless bidding not only puts the bidder at risk, but threatens to destabilize the market for other players with cooler heads.

For instance, in a highly competitive category where two players have similar margins, there is a constant balancing act going on, with both players weighing cost per acquisition and volume of sales against volume of traffic. One player then decides to let his ego get the best of him and enters insane bid parameters, taking the brunt of the traffic at an impossible-to-monetize cost per click. (As you are likely aware, the difference in traffic volume resulting from a No. 1 listing versus that of a No. 2 listing can be worlds apart.)

One knows that the player with the inflated sense of ego is not long for this world. The trick is to continue balancing cost and volume at lower positions while waiting for Mr. Swelled Head to relax a bit and realize he's paying $20 for a customer with a lifetime value of $15. While waiting for him to make that realization, you're losing volume and putting time into finding alternative venues with the correct pricing parameters. Eventually, the emotionally-driven bidder is going to either drop his bids or go out of business. But what to do in the meantime?

The first step is to automate your bidding, such that when your competitor makes a move to control his costs, you'll be able to capitalize on the move. Bidding tools can manage search inventory and costs to budget, or to a given return on investment. You want to use such a tool to immediately pounce once your competitor makes a move.

Secondly, you'll want to look into other venues. While the larger pay-per-click-supported search engines tend to make up a large percentage of overall Internet searches, there are smaller venues that can deliver qualified traffic in volume at an acceptable cost. There are hundreds of such vehicles and many of them can be managed with the bidding tools I described above. Look particularly to any PPC search vehicles that are specific to your industry or category.

Thirdly, you'll want to monitor what your irrational competitor is doing from a bidding strategy standpoint. Are there certain times of the day or the week during which his bids drop? Does his flow of traffic exhaust his budget such that you can capture traffic after he hits his daily limit and his funds dry up? Are there relevant search terms on which he currently isn't bidding?

The one thing you certainly don't want to do is join him in La-La Land. That will result in a bid war which neither of you will win. You'll simply be paying too much for traffic, to the point at which you won't have a prayer of making a profit on customers.

Cooler heads will prevail. Just avoid being drawn into the ego-centric bidding zone and you'll do fine.