Google just reported its quarterly earnings. They did very well, beating pretty much every analyst’s numbers. Those who want to nitpick will complain that the price per click has gone down. However, that isn’t really surprising considering that the number of clicks went up. There are some issues coming with Google’s stock, but this isn’t one of them.

Google Cost Per Click Down

Google’s advertising model is based on advertisers paying either “per click” or “per impression.” Actually, advertisers pay per every thousand impressions, but that isn’t the point. Advertisers who pay using the per click model pay a certain amount each time someone clicks on their ad, but nothing if the ad goes unclicked.

A smart online advertiser using the per click model will determine how much each click is worth. There can be many ways of determining this, and numerous intangibles are considered by some advertisers. However, the most simple concept would be something like this.

Maximum payable cost per click = Amount of revenue generated per click / Number of clicks necessary to generate revenue.

In other words, if you generate $1 per transaction (this is called a conversion) and it takes you 10 clicks to generate one transaction, you can pay no more than 10 cents per click, which break even. You’d have to pay nine cents per click to generate a profit.

Google chooses which ads to display using an algorithm that takes into account several factors including the quality of the ads, how often they are clicked, how often they convert, and so on. However, all other things being equal, the highest paying ad is placed first. Furthermore, each advertiser can set various limits on the way their ad dollars are spent. When an advertiser’s limit is reached, his ads no longer display, regardless of their offering price.

With this in mind, we can see that if the number of clicks go up, the cost per click will go down, assuming all other factors are unchanged.

Here is how it looks.

• Advertiser A offers 50 cents per click, up to 1,000 clicks per some time period.
• Advertiser B offers 25 cents per click, up to 1,000 clicks per some time period.

That means that:

• The CPC will be 50 cents so long as there are 1,000 or less clicks.
• The CPC will be less than 50 cents if there are more than 1,000 clicks.
• The more clicks there are beyond 1,000, the further the CPC will drop.

As you can see, if advertisers make no changes to their advertising budgets and limits, the CPC will always drop when the number of clicks increases.

In fact, if the number of clicks and the the CPC increase at the same time, then that is an indicator that advertisers have dramatically increased their ad spending on Google. Because, in order for both the CPC and the number of clicks to increase, the additional CPC must offset the lowering power of an increasing number of clicks.

The other big news out of Google’s earnings today was the so-called stock split being used to shore up the founder’s control of the company. This isn’t really necessary, and we’ll explore why tomorrow.

Related posts:

1. Google Posts Higher Than Expected 3rd Quarter Numbers – Is The Recession Over
2. Lower Your Taxes – Increase Tax Deductions 2010

Google Lower Cost Per Click Doesn’t Matter originally published at Personal Finance Blog - FinanceGourmet.com

Has Google Already Beating Groupon?

Not long ago, Google offered to buy Groupon for $6 billion. Soon thereafter, Groupon did another round of private equity financing that essentially paid off company founders and early investors such that they have already locked in sizable gains. That might be a very good thing since Groupon seems to be in trouble before it even goes public.

Update: Groupon has updated its IPO filing documents again. Follow the link for the latest.

Groupon’s IPO Filing

Groupon has already had to adjust the documents it originally filed in order to do an initial public offering (IPO) of stock. It de-emphasized a widely mocked financial metric that essentially didn’t count certain expenses. That isn’t a huge thing by itself, although it does potentially show what Groupon thinks of the sophistication level (or lack thereof) of those who would buy Groupon’s IPO.

Groupon’s management took the somewhat controversial step of trying to comment on all the negative publicity its IPO has been getting by sending out a company-wide email to employees saying exactly the kinds of things that you aren’t allowed to say during the SEC mandated “quiet period” before a public offering. Of course, they were shocked, SHOCKED, to find out that the email had been leaked to the media which ensured its wide, very public, dissemination.

No word on whether the SEC will take any action on the matter. (If not, look for plenty of other companies to have “accidental” leaks in the run-up to their IPOs.)

Google Offers vs. Groupon

Next up, Google decided to get into the daily deals / local discount business itself. It started with just a few markets, but recently opened in several others including here in Denver, where Google Offers offered $20 at the popular Tattered Cover bookstore for just $5.

(Disclosure: I bought one of the Tattered Cover Google Offers, although I have no affiliation with Google or the Tattered Cover other than as a customer.)

In other words, the copycats that Groupon has so effectively dismissed in the past are getting bigger and if that IPO doesn’t hurry, there might be some disturbing statistics showing that Groupon is not long for this world as anything other than a takeover target. (Paging Microsoft Bing.) Don’t count on a $6 billion bid, though.

On the other hand, if Google can’t break Groupon’s hold on the market, investors (and retailers) might be convinced no one can, in which case, Groupon stock would be a very good investment.

Which is it? Time will tell, but as I’ve noted before Groupon is too easy to copy. The only real question is has everyone else started worrying about that too, or will Groupon get through its IPO before anyone gets uneasy?

No related posts.

Is Groupon Public Yet? originally published at Personal Finance Blog - FinanceGourmet.com

To hear many of the newspapers and other media outlets tell it, Google’s blowout third quarter is the official signal that the recession is over and that businesses are spending again, because customers are spending again, and everything is fine again.

The logic goes something like this. Google is not only the largest search engine, but it is also the largest provider of Internet advertising, particularly in America where its ad market share is something like 75% or so. Thus, Google acts as a bit of a proxy for the online advertising market in general. Online advertisers, then, spend money on online advertising only when, a) they have the money available to spend, and b) there are customers out there spending money to attract. So, theory is that since Google’s earnings came in above expectations, then that shows that advertisers are spending more money on online ads, which therefore means that more consumers are spending money online. That’s the idea, anyway.

Google Is Not The Economy

It is tempting to pronounce everything that Google does and everything that happens to Google as very important to major aspects of American life, including the overall business environment, and the U.S. economy. After all, Google is probably one of the most followed stocks in the country. Those who own shares can’t stop obsessing about them (and using them as proof that they are smart investors) and those who don’t own them can’t stop obsessing about whether or not they should cost as much as they do. Analysts trip over themselves raising their 12 month price expectations and revenue forecasts, each one dying to be the one who was "right" by calling the huge upward move in the most popular stock.

However, there is a major problem with using Google’s fortunes in this way. Regardless of whether or not Google’s stock is or is not a good investment now, the company makes a very bad barometer of the current state of business and by extension, the economy overall.

Google’s advertisers are almost exclusively smaller businesses. As such, Google’s fortunes do not connect very much with the major corporations whose fortunes move the most widely followed market barometers like the S&P500 Index, the Dow Jones Industrial Average, and even the NASDAQ 100.

While small business is a major component of the U.S. economy – some statistics suggest that small businesses are THE drive force of the American economy – there is a very big disconnect between most small businesses, and those who advertise online via Google and other ad networks. Entire segments of the small business economy have nothing to do with online advertising. Mom and Pop stores on Main Street, U.S.A. typically do not find their customers online.

In fact, the vast majority of all online ads are placed by online retailers, which is a very small subset of small businesses overall. Furthermore, increased online spending could actually be an indicator of LESS spending by U.S. consumers. After all, many people turn to online retailers hoping to find cheaper prices, different products than they would normally buy, a way to save money by not paying sales taxes, and of course, to shop around for the lowest prices without ever leaving their homes.

While many other indicators seem to be pointing toward a recovering U.S. economy, including the fact that over 70 U.S. cities are no longer statistically in a recession at all, using Google as the proverbial canary in the coal mine for the American economy, carries a very significant possibility of providing the wrong signal at the wrong time.

Related posts:

1. Is The Recession Really Over – Recession Ended in June 2009 News Reports Say
2. Apple Earnings Way Up for Quarter

Google Posts Higher Than Expected 3rd Quarter Numbers – Is The Recession Over originally published at Personal Finance Blog - FinanceGourmet.com