Google recently released a report about their estimated economic impact, claiming an $80 billion contribution to the US economy. I’ll leave the tirade about how businesses spending money on Google’s AdWords translates into “economic impact” for another time, but I wanted to point out something from their “How we calculate Google’s economic impact” page that I personally found a little wonky. See if you can spot it:
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. 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.
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