Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Search Ads ====== Search Ads (also known as Paid Search or [[Pay-Per-Click (PPC)]]) are a form of online advertising where businesses pay to have their advertisements displayed on a [[Search Engine Results Page (SERP)]]. When you type a query into a search engine like Google or Bing, the sponsored links that appear at the top and bottom of the page are search ads. The system is auction-based: advertisers bid on specific keywords or phrases they believe their target customers will use. The magic, however, is that they typically only pay when a user actually clicks on their ad—hence the name "Pay-Per-Click." For investors, understanding a company's search ad strategy is like getting a peek under the hood of its marketing engine. It's a highly measurable channel, offering direct insights into how effectively a company is acquiring new customers, the strength of its brand, and the intensity of its competition. Giants like [[Google Ads]] (for Google Search) and [[Microsoft Advertising]] (for Bing) dominate this landscape, turning user intent into a massive, revenue-generating marketplace. ===== How Search Ads Work ===== At its heart, the search ad system is a sophisticated, real-time auction that happens billions of times a day. But it's not a simple case of the highest bidder always winning. Search engines want to show users the most relevant ads, not just the ones from the company with the deepest pockets. This ensures a better user experience and encourages advertisers to create high-quality campaigns. ==== The Auction System ==== Every time a user enters a search query that matches an advertiser's keywords, an auction is triggered. The position of an ad on the page (its "Ad Rank") is determined by two primary factors: the advertiser's maximum bid and a metric called [[Quality Score]]. The simplified formula looks something like this: **Ad Rank = Maximum Bid x Quality Score** This is fantastic news for savvy businesses and the investors who back them. A company with a highly relevant ad and a great website can actually pay //less// than a competitor for a //better// ad position. [[Quality Score]] itself is a blend of several factors, including: * **Ad Relevance:** How closely the ad's text matches the user's search query. * **Landing Page Experience:** The quality, relevance, and user-friendliness of the webpage the ad directs to. * **Expected [[Click-Through Rate (CTR)]]:** The likelihood that a user will click on the ad when it's shown. ==== Keywords are King ==== Keywords are the words and phrases that trigger the ads. For investors, it's useful to distinguish between two main types: * **Branded Keywords:** These include the company's own name or product names (e.g., "iPhone 15" or "Coca-Cola"). A high volume of searches for a company's branded terms is a strong indicator of powerful [[Brand Equity]]. * **Non-Branded Keywords:** These are generic, problem- or solution-oriented terms (e.g., "best running shoes" or "low-cost stock broker"). Companies bid on these to capture new customers who may not yet be familiar with their brand. A company's mix of branded versus non-branded keyword strategy can reveal a lot about its market position and growth tactics. ===== What Search Ads Tell a Value Investor ===== Analyzing a company's reliance on and efficiency with search ads provides a powerful, contemporary lens for evaluating its business health and competitive standing. ==== A Window into Customer Acquisition Cost (CAC) ==== Search ad spending is a direct and highly measurable component of a company's [[Customer Acquisition Cost (CAC)]]. As an investor, you should ask: * Is the company's spending on paid search growing faster than its revenue? * Is it becoming more or less efficient over time, meaning is its cost-per-click rising or falling for key terms? A steadily rising CAC without a corresponding increase in the [[Lifetime Value (LTV)]] of a customer can signal trouble. The ideal is a healthy [[LTV/CAC ratio]], where the value of a customer far exceeds the cost to acquire them through channels like search ads. ==== Gauging Competitive Intensity ==== The cost of keywords is driven by supply and demand. If a company operates in a space where costs for its core, non-branded keywords are skyrocketing, it's a clear sign of intense competition. This can squeeze [[Profit Margins]] as rivals bid up the price to capture the same pool of customers. This digital battleground is a modern extension of a company's [[Moat]]. A business that must constantly fight and pay a premium for customers online may have a weaker competitive advantage than one that doesn't. ==== Brand Strength and Organic Traffic ==== Finally, it's crucial to contrast paid search with its "free" counterpart: organic search. Organic results are the unpaid listings that appear because the search engine's algorithm deems them the most relevant answer to a user's query. This is the domain of [[Search Engine Optimization (SEO)]]. A company with a strong brand and effective SEO will rank highly in organic results, generating a steady stream of traffic without paying for every click. A value investor should be cautious of any company that is //overly// reliant on search ads for its traffic. This can be a fragile and expensive strategy. The strongest businesses use search ads as a supplement—a tool to strategically target specific customer segments or fend off competitors—while a powerful brand and great content drive a durable flow of low-cost organic traffic.