How Game Theory Affects PPC Marketing

How Game Theory Affects PPC Marketing

ppc marketing strategy

One of the most memorable scenes from A Beautiful Mind takes place at a bar. A handful of men contemplate competing for the hand of a pretty blonde; Russell Crowe’s character, Dr. John Forbes Nash Jr. explains if they all compete for the blonde, no one will get her; but, if they ignore the blonde and seek out her brunette companions, they won’t block each other, and they’ll not offend the other women for being second choice. “That’s the only way we win,” he says.

To summarize a long article by Wordstream, this is game theory at its finest. But game theory isn’t just for the silver screen or economic geniuses; it’s philosophy could become a common practice in PPC advertising.

PPC and Cooperation Among Competing Companies

Did you know that companies make deals with each other to avoid the proverbial blonde? It’s true, and it happens more often than you’d think.

It’s not uncommon for large companies to collaborate with other companies on which brand term keywords they want to use, in exchange for avoiding another company’s brand term keywords.

Why would they do that?

Let’s say Company A spends a million dollars on PPC targeted at Company B’s keywords and scores 10,000 new customers. Now Company B retaliates, and spends $1 million on PPC targeted at Company A’s keywords, and they get 10,000 new customers. Both companies are back where they started.

According to Wordstream’s article, “…new ad technologies have made this type of collusion far more effective…10 to 100x more effective!”

But be warned, game theory in PPC advertising has led to murky waters. For example, 1-800-Contacts is currently being sued by the U.S. Federal Trade Commission for anticompetitive behavior. The contact company struck 14 agreements, which resulted in reduced price competition and higher prices for consumers.

Nonetheless, there’s a lot we can take away from this example of game theory applied to PPC marketing.

Game Theory in PPC Practice

The price a company pays per click is related proportionally to what the other advertisers are willing to pay for the same search term. This is why 1-800 Contacts is currently under fire. They basically cut out the competition, which drove the price per click down. In game theory, this is the same as avoiding the blonde and focusing on her friends.

These agreements can be arranged in a number of ways including exclusionary targeting, which would include switching target market lists with the competition, and excluding all the people on the competition’s list from your own PPC efforts; or, not competing over customers at all, and instead focusing on non-competitive audience targeting, things like remarketing lists for search ads (RLSA).

In the latter, every company has unlimited search terms to work with, but would benefit by expanding the scope of non-competitive remarketing and not going after consumers with general PPC advertising.

While game theory in PPC is certainly debatable, non-competitive practices are an enticing idea when search term prices are high. Is PPC doomed to be competitive forever, or is the blond woman at the bar worth the sacrifice if everyone can win?