There’s some things that pass through my RSS feed that I find utterly unbelievable, yet I fear even thinking about the amount of time I’d have to spend disabusing them in a post. The Google Economic Impact Statement for the United States in 2011 is one of those things. The report, which boasted proving an $80 billion contribution to the US economy, was something that passed through the technorati filter with nary a hiccup. I found the document itself, while impressive in page count, to be a little less satisfying in terms of actual substance. First, a simple graphic depicting the content of the 116-page report, by number of pages:
Out of the 116 pages, 50 are taken up by the same exact page with only the name of the state changed. 50 document some business that has Google’s advertising to thank for its livelihood.
There’s one page that has actual calculations on it, and it has to do with how the AdWords impact is calculated. Before I get into that, the other sources of the economic impact used to calculate the statement are Google AdSense (the money websites make from Google for hosting their ads), and Google Grants, the program by which Google offers non-profits free advertising. I’d argue that these 2 legs of the stool make up a deminimus part of the total because 1. there’s no bragging about how much money Google gives via AdSense and 2. Google says it has only given away $860 million in the almost 10 years the Grants project has existed.
Back to the methodology of AdWords. My apologies for the partial re-post of my earlier piece.
To estimate the economic impact of Google Search and AdWords, we rely on two conservative assumptions. First, that businesses generally make an average of $2 in revenue for every $1 they spend on AdWords. Our Chief Economist, Hal Varian, developed this estimate based on observed cost-per-click activity across a large sample of our advertisers; his methodology was published in the American Economic Review in May 2009. Our second assumption is that businesses overall receive an average of 5 clicks on their search results for every 1 click on their ads. This estimate was developed by academic researchers Bernard Jansen and Amanda Spink based on sample search log data and published in the International Journal of Internet Marketing and Advertising in 2009.
If search clicks brought in as much revenue for businesses as ad clicks, these two assumptions would imply that businesses receive $11 in profit for every $1 they spend on AdWords. This is because, if advertisers receive 2 times as much value from AdWords as they spend on AdWords, and they receive 5 times as much value from Google Search as they do from AdWords, then the total profit they receive is 11 times what they spend, or
2(spend) + 5 x 2(spend) – (spend) = 11(spend)
However, clicks through search results may not be as commercially valuable as ad clicks, so we want to be conservative: we estimate that search clicks are about 70% as valuable as ad clicks. This means advertisers overall receive 8 times the profit that they spend on AdWords,
or 2(spend) + .7 x 5 x 2(spend) – (spend) = 8(spend)
Therefore, we conservatively estimate that for every $1 a business spends on AdWords, they receive $8 in profit through Google Search and AdWords.1 Thus, to derive the economic value received by advertisers, we multiply our AdWords revenue on Google.com search results in 2011–what advertisers spent–by 8.
Did you hear that, Internet? For every dollar you spend on Google’s AdWords, that dollar is paid back eight times. The 8x number is the foundation of what I would argue is the major leg of their conferred economic benefit. There are no diminishing returns mentioned; only an 8x upside for every dollar. Did you think the opportunity to return your investment eight times was only a myth? Google’s economic impact statement is here to assure you it is not. And that’s not even eight times a return in revenue – that’s eight times your investment returned in profit1. It says so right there! I’ll pause a moment and let all of you entrepreneurs out there rush to reallocate your advertising budgets to consist of nothing but Google AdWords.
I’m sure there’s a perfectly reasonable explanation for this, but I can’t for the life of me think what it could be. I welcome alternative theories in comments.
1OK, so the revenue/profit slip is probably just shoddy editing, but you’d think such a front-facing document that proclaimed to do so much good would be a little more careful with terms like “revenue” and “profit”. They tend to mean slightly different things to people who actually make stuff.