Smart Pricing and What it Means to AdSense Monetized Sites

Smart Pricing has always received a lot of attention in publisher forums & online discussions and - next to MFA - it is probably one of the most important topics for publishers earning money from AdSense.

I have to also mention that; as we launched some poorly-converting sites with very low CTR (they were brand new sites in a very competitive niche), we saw an entire AdSense account of 35+ sites go from a very high CPM down (very far down) to almost exactly match that of the newer, poorly converting sites. So in our observation, it seems (from our experience and that of our peers anyway) that Google will smart price entire accounts even though you may only have one or two poorly converting sites.

For this reason and this reason alone, Smart Pricing can be very bad for publishers with a portfolio of otherwise great sites, since it can remove a lot of the monetary incentive that media creators and bloggers would earn from launching new sites and publishing new content in other highly competitive niches. Most small publishers wouldn't have the option of creating a new AdSense account for every new site to isolate their AdSense account from one poorly converting site (since this would most likely violate the AdSense TOS).

But what is Smart Pricing?

According to Google, smart pricing assigns clicks values based on a variety of factors, most of which they won't divulge (and probably for good reason, since this is NOT a system anyone would want exploited). Advertisers are still supposed to be ranked by relevance and bid price. Smart Pricing however, will lower the amount they pay for certain clicks appearing on smart priced sites.

We believe this means that high paying ads are only distributed onto sites that have proven traffic and conversion rates for Advertisers. Advertisers (the people paying for the ads), want their ad spending to convert into consumer spending on their site. They therefore (through Ad Words campaigns) may track the "conversion" of each click from a paid ad to see what ratio of paid clicks actually turn into a sale. We believe that if the Advertiser sees good conversions from a site, the portion of revenues the publishers get from their ad click bids goes up.

However, I am convinced a lot of AdWords subscribers don't use Google Analytics to track conversions. So how would Google track conversions on sites that don't use analytics in conjunction with AdWords? Also, many advertisers are using AdWords to simply drive traffic to their sites, increase mindshare or promote brand identity. How would these types of advertisers even quantify their conversion metrics with Google?

Questions like this make me feel that Google may be unfairly smart pricing some sites, and that there may be some significant flaws in the system. Many Publishers have reported their site revenues suddenly (and quite dramatically) going down overnight. Some of these publishers rely on AdSense revenues as their primary income. It is becoming increasingly difficult to make a reliable living exclusively as a small media publisher. It is hard enough to create the buzz and organic traffic to make a site popular enough to earn a living from, but with unstable advertiser income compounding the problem, many publishers might lose the incentive to carry AdSense, and may instead switch to other providers such as Adbrite, Yahoo, MSN, BidClix or other text-based contextual adverting engines.

However, many publishers fear losing their AdSense revenues (even when they are unstable) and are reluctant to switch over to a new engine. We have had discussions with some publishers that saw their revenues plummet overnight to less than 50% of their previous levels and still would not consider switching to a new ad engine. These publishers earn their entire living from AdSense and just cannot afford to risk any more disruptions to their income. Is this a typical scenario? We can't be sure at this point, since many publishers are reporting record earnings, and are doing amazingly well.

It is tough (if not impossible) to infer the logistics of smart pricing and other AdSense distribution and pricing strategies from an external perspective. Perhaps an apropos analogy would be the fable of the blind men who tried to describe an elephant by touch. Of course, all of them "saw" something different since they (individually) could not feel enough of the entire animal to describe what it was.

To some degree Google needs to be secretive about their strategies but perhaps they could divulge more information to publishers regarding how they can get out of the smart pricing trap and increase their percentages of ad click revenues.

Some strategies we recommend (but make no promises regarding their effectiveness) are:

1. Do not rely on purchased bulk traffic to get viewers to your site. In our experiences at other companies, we have found this strategy only causes reductions in CPM and CTR and may contribute to decreased ad payout percentages through Smart Pricing. Also, your ad distribution may be skewed to only display low paying ads.

2. Increase your organic traffic steadily through traditional search engine marketing strategies such as reciprocal linking, clean markup, regular content updates, and relevant material. We don't recommend blitzkrieg marketing strategies that dramatically increase your short term traffic and then just as dramatic decreases in overall traffic. We believe that consistent demographics with high percentages of repeat visitors will help increase the likelihood of conversions from ad clicks.

3. Check out services such as text-link-ads.com that let you buy links on other popular websites. We have no direct evidence to support this theory, but we believe that sites with higher PR ratings get better ad deliveries. In any case, having links to your site is generally a good thing anyway, so we feel the money is well spent.

4. Try and get your site submitted to popular web directories such as DMOZ. Is your site content relevant to a Wikipedia entry? Links in Wikipedia may have good returns in terms of traffic generation. The traffic is generally highly targeted, and relevant to your target demographic. We have found that this kind of traffic (over time) generates good click throughs and better quality ads.

5. Try and eliminate MFA sites using AdsBlacklist and the Competitive Advertiser Filter (see our previous article on this subject)

There are many strategies to increase the CPM and CTR of the advertisements on your website. The best strategies generate "clean" clicks for the advertisers on your site and directly result in sales of the advertiser's products (conversions) . If you find you aren't having success over the long term with Google, but still generate quality, targeted traffic, you may want to check out other advertising engines such as Adbrite or Yahoo (YPN).