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Behind the Curtain: The Strategy of Search Ads

Sep 23, 2011

by jasondavis

Etsy.com handmade and vintage goods

I’m Jason, and I’m the director of data and search at Etsy. I lead the team of engineers working on our Search Ads system. Earlier this week we introduced this new service, and I’ve been impressed by a number of questions about how it works and why we made the choices we did in building it. Today, I’d like to tell you a bit more about the strategy behind the Search Ads system, and hopefully address some of the questions.

First, some background. Prior to Etsy, I was founder and CEO of the online advertising company Adtuitive, which Etsy acquired several years back, where we specialized in ads for small online retailers. Our team has many years of experience in the online ad industry, including at Google, and we have built and designed ad systems previously. So we drew on this experience when we designed and built our new advertising system for Etsy sellers.

Our primary goal was to make Search Ads simple to use while also being effective. One of the biggest concerns we had when building Search Ads, was that we would make it too complicated for sellers to use, or too time consuming for them to understand. We wanted to make a system that was accessible for all of our shop owners; one that could be understood and effective for people that have never purchased online advertising before, and equally effective for those familiar with it. We did a lot of research to this end, and here are some of the motivations behind the choices we made in building Search Ads.

Bidding on keywords (a practice used in other online ad systems like Google’s AdWords), is not simple. How much would you be willing to pay for the keyword “wooden bowl”? How much would you pay for “silver bowl”? Auctions are very powerful but also very complex — and we didn’t want to build a system where you needed to hire a marketing consultant to effectively use it.

Like Search Ads on Etsy, most things you buy in life are actually dynamically priced. Imagine if you went to the grocery store and had to bid on the price for each vegetable in your cart. We’ve made many efforts to price keywords to reflect the value that sellers will realize by using the system. We’ve done this by analyzing years of search query data, purchase data, and buyer behavior data. Of course, Search Ads is still in its infancy, and prices will evolve to reflect usage of the system.

Another question that has come up is why we chose a “cost-per-mille” (CPM) v.s. “cost-per-click” (CPC) model. Even though popular ad systems may sell their ads on a per-click basis, almost every online advertising system uses a CPM model to price their ads. This includes Google and Facebook. When Google charges you per-click, the amount you pay depends on something called your “quality score.” For example, I might pay $2.00 per click for the keyword “silver bowl,” but my friend Frank may pay only $1.00 per click. This is because Frank’s quality score is twice as high as mine. The quality score serves as a measure of click through rate. If Frank’s click through rate is 1% and mine is 2%, then each of our effective CPMs would be $10.00. Google sells ads on a CPM basis as well: Natalie can come along and bid on the keyword “silver bowl” directly for $10.00 CPM.

Cost-per-click pricing works best in a sealed-bid auction (like Google or Facebook) where you can’t see anyone else’s bids. Given that Search Ads on Etsy is not auction-based and that we want to be as transparent and open as possible about pricing, we decided against using a quality score and to charge directly on a CPM basis. We also openly publish our prices.

Once ads go live next week, sellers will be able to see performance of their ads on their shop stats console. In particular, we’ll be showing  performance broken down on a per-keyword basis. This will give sellers a sense of which keywords work well and which don’t and will allow sellers to tune their Search Ads and decide to eliminate or add keywords or items to their campaigns. We are also looking into showing a greater number of keyword suggestions to sellers to provide more control over when their ads appear.

We can’t wait for ads to go live next week. Ultimately, our community of buyers and shop owners will be the arbiters of success.