Google ads get pricey for Indian start-ups

In last 5 years, prices for keywords on Google's AdWords platform have gone up three to five times

For India’s internet companies, advertising on Google is becoming increasingly expensive as more traditional offline businesses are now taking to campaigning on the web.

In the past five years, prices for keywords on Google’s AdWords platform have gone up three to five times in certain verticals. While the bulk of this increase was driven by cash-flush start-ups willing to burn millions to woo customers, prices remain high owing to demand from traditional offline players.

While internet companies have largely cut spending on advertising and customer acquisition, many say the cost of purchasing AdWords has not reduced. The platform, which uses auctions to set the price of an ad spot, is expected to witness the prices hit 50 per cent of the cost of a product itself in certain sectors such as education.

“Most of the increase happened in 2013 right up to mid-2015 where the prices went up about three times. Between 2015 to now, it’s been more or less stable. There were a lot of competitors who in the last two years have fallen away, which has probably created some sort of stabilisation,” says Kashyap Vadapalli, chief marketing officer at online furniture start-up Pepperfry.

Several sectors, which might be seeing a resurgence in consumer demand, are paying through the nose to show up at the top of Google’s web search results. In banking and financial technology (fintech), currently on a high in India, players are known to spend as much as Rs 1,000 on a single click. While Google assures sending traffic your way, that isn’t a guarantee that a customer will buy the product.

In order to keep its ad spends from spiralling out, Pepperfry says it has become a lot more disciplined in the way it uses AdWords. Gone are the days of bidding on words and phrases vaguely related to furniture or its business, says Vadapalli, adding that now the focus is on accuracy and high conversion. Despite the company’s average order value being Rs 17,000 and margins on furniture being high, the company is looking at reducing its AdWords spends.

For some verticals, however, the option to move away from Google is a little tougher. Simplilearn, an online platform for reskilling of professionals, is looking to target business customers after seeing the cost of acquiring individual consumers spiralling out of control. “If you look at most of the consumer-facing companies, their biggest problem is cost of customer acquisition. Most of the money is taken away by Google, to the extent that it's become unsustainable if someone is only looking at doing paid marketing to get customers,” says Krishna Kumar, founder and chief executive officer of Simplilearn.

According to Kumar, for a course costing $100, the cost to acquire a customer through digital mediums would be as high as $40. Players in the B2C (business to consumer) side continue to pay such exorbitant prices with the hope that once a customer uses their product, they will come back for more the next time around.

Kumar blames the unsustainability of the business on Google’s sheer scale in India, where 90-95 per cent of the country’s internet users access its search engine.

Google, however, brushes off any accusation of it being a monopoly, assuring that it has nothing to do with the cost of AdWords and instead relies on a secondary auction model to sell ads. The highest bidder for a particular keyword or phrase only pays a little more than the bid of the second-highest bidder, ensuring that costs remain under control to some extent, says the technology giant.

Google says increasing competition for AdWords is the reason for high costs incurred by players in the online space, as more traditional retailers have begun using the web. “What’s happening is that even if you see a slowdown in advertising from online players, a host of small retailers are coming in. So, I think the auction pressure is still up there and we don’t see the number of advertisers dropping,” says Nitin Bawankule, director of e-commerce, retail and several other verticals at Google India.

Globally, Google’s focus is on reducing the cost-per-click (CPC) to attract more advertisers to its platform.

Google might offer the largest pull-based marketing tool, with over 90 per cent of India’s 400 million internet users accessing the company’s web search service, but there are alternatives.

Fintech start-up MoneyTap largely uses Facebook for its digital marketing, and is seeing great results. The company says while the audience it reaches out to on Facebook might not have come on to the platform with the intent of buying some of its services, with the right targeting they are able to extract good return on investment.

Facebook and Google together account for seven out of every Rs 10 spent on all digital advertising in India today, with both companies having access to hundreds of millions of Internet users.