traffic-acquisition-cost

Why Traffic Acquisition Cost Is The Key Metric To Understand Google Success

The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case to keep it stable. In 2021 Google spent 21.75% of its total advertising revenues (over $45.56 billion) to guarantee its traffic on several desktop and mobile devices across the web.

Year Traffic Acquisition As % Of Total Advertising Revenues (Analysis by FourWeekMBA)
2002 23%
2003 37%
2004 39%
2005 34.9%
2006 31.5%
2007 30.1%
2008 28.1%
2009 27%
2010 25.9%
2011 24.1%
2012 25.1%
2013 24.2%
2014 22.6%
2015 21.3%
2016 21.2%
2017 22.7%
2018 22.95%
2019 22.32%
2020 22.31%
2021 21.75%

Why traffic has been a critical driver for Google’s success all along

As of the time of this writing Google is the most popular website on earth. It is important to remember that. Indeed, as a search engine, we often forget that Google is also a website, a place on the web where people go voluntarily to find information of any time. As a website, Google needs to make sure to have a constant stream of traffic on its search results pages.

To attract traffic Google has developed several strategies throughout the years. While its ability to index the entire web and show by time to time results based on users searches. Ordered by relevance and authoritativeness (its ranking system) has proved a critical weapon to its success. However, were users not going back to Google over and over again, its search engine would not have improved. Thus, it would not have been able to succeed at the level it did today.

Indeed, users’ data is critical for Google experimentation and change, thus improvements. Between 2017-18 of over 200,000 experiments Google made over 2,400 changes to its search algorithm. 

As years went by, Google is accelerating its experimentation, nonetheless its size, from small changes, to larger algorithm updates, Google’s engineering teams perform thousand of experiments each year. 

Google business model starts by finding the sweet spot between traffic and monetization

Since its first distribution deals, Google understood right away that monetizing its pages was the key to its success. Many search engines and websites back then drove traffic which was not qualified enough to be monetized or at least to be monetized at the point of creating a successful and sustainable business.

Yet Google once found the right traction channel (be it AOL, Netscape or any other deal that would come afterward) it managed to find the sweet spot which allowed it to monetize its pages enough to be extremely profitable.

Therefore, a key metric to look at to understand Google success is its traffic acquisition cost.

What does the traffic acquisition cost stand for?

The traffic acquisition costs represent the expenses of an internet company, like Google, has to incur to generate enough revenues to sustain the business. When the revenues run faster compared to the traffic acquisition cost that is when the internet business becomes sustainable.

Keeping the traffic acquisition costs at a stable level over the years is the key to make sure the company remains sustainable and financially successful. This implies a set of initiatives to create a network of partners, distributors, and any other way that allows the company to attract qualified traffic that converts into revenues for the business.

What does the Google traffic acquisition cost comprise?

Cost of revenues consists of TAC which are paid to Google Network Members primarily for ads displayed on their properties and amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.

As specified in its financial statements Google traffic acquisition costs (TAC) comprise the payout to Google partners, which take part to program like AdSense. It also comprises browser providers, mobile carriers and any other distribution channel.

Many give for granted Google success. Yet from its first days Google managed to close massive deals that guaranteed it enough distribution and traction to grow substantially over the years. Netscape, AOL, Safari and many other channels guarantee to Google an enormous amount of traffic each year. That traffic also has a cost.

Why Google traffic acquisition cost is more expensive for AdSense?

The cost of revenues related to revenues generated from ads placed on Google Network Members’ properties are significantly higher than the costs of revenues related to revenues generated from ads placed on Google properties because most of the advertiser revenues from ads served on Google Network Members’ properties are paid as TAC to our Google Network Members.

The traffic that comes from Google main properties (like its main search pages) is less expansive than the traffic coming from the sites part of AdSense. The reason is pretty simple; Google has to give most of the revenues coming from AdSense to the websites part of the network. The AdSense network has been critical to Google success to allow it to serve organic results, besides it paid results. Even though the traffic cost is higher, so far AdSense has played an essential role in the overall Google business model.

Breakdown of the Google traffic acquisition costs

Of the total cost of revenues, traffic acquisition costs represented a good chunk of it. For instance, in 2021 Google spent 21.5% of its total advertising revenues in traffic acquisition costs.

For a bit of context, this represented an over $45 billion expense in traffic acquisition costs. 

As specified in its financial statements, TAC included:

Amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers and Amounts paid to Google Network partners primarily for ads displayed on their properties.

They also explained: 

Cost of revenues was $110.9 billion, an increase of 31%, primarily driven by increases in TAC and content acquisition costs. An overall increase in data centers and other operations costs was partially offset by a reduction in depreciation expense due to the change in the estimated useful life of our servers and certain network equipment.

Thus, most of the growth in Google’s expenses was represented by its traffic acquisition costs!

What factors affect Google traffic acquisition costs?

Traffic acquisition costs is a critical factor of Google past and future success. It is also a significant business risk. In fact, as users’ ways to consume content change over the years, this makes it harder for Google to keep up with its traffic acquisition costs.

For instance, as we’ve been moving from desktop to mobile, the traffic cost for Google has proved higher, however also easier to monetize. Thus, even if it grew, Google managed to have its revenues to grow faster than its costs.

As listed in the Google annual report some of the causes of increased traffic acquisition costs are:

  • Google Network Members TAC rates are affected by the continued underlying shift in advertising buying from traditional network business to programmatic advertising buying
  • Google properties TAC rates are influenced by device mix between mobile, desktop, and tablet, partner mix, partner agreement terms such as revenue share arrangements, and the percentage of queries channeled through paid access points
  • Growth rates of expenses associated with the data center and other operations, content acquisition costs, as well as Google hardware inventory and related costs
  • Increased proportion of non-advertising revenues, whose costs are generally higher about its advertising revenues
  • Relative revenue growth rates of Google properties and Google Network Members’ properties

The traffic monetization multiple 

googles-traffic-monetization-multiple
Companies like Google have to cut distribution deals and split revenues with content partners to bring traffic back to their main properties online. For instance, in 2021, Google spent over $45 billion in traffic acquisition costs, but it generated over $209 billion in advertising revenues. This means that Google could monetize its traffic 4.6 times its traffic acquisition costs. An increased monetization multiple over the years is a good sign. It means that Google was able to keep its advertising machine competitive. On the opposite side, a negative monetization multiple means the advertising machine is losing traction.

Another metric, hooked to the traffic acquisition costs, is what I like to call “traffic monetization multiple.” Or how many times over is the company able to monetize its traffic. 

For instance, in 2021, Google spent over $45 billion in traffic acquisition costs, and it managed to generate over $209 billion on top of its advertising machine! 

This means a 4.6x ratio. The higher the ratio, the better, provided that the advertising machine doesn’t squeeze advertising partners (for instance, by increasing prices too much) and it doesn’t mess up the UX (for instance, by serving too many ads).

When the advertising machine can be monetize more effectively, without affecting the above-mentioned aspects, that is when the business is growing in a solid way! 

Summary and conclusions

It’s easy to give for granted Google success in terms of traffic; Yet Google is a website, which needs a continuous flow of qualified traffic that makes it able for the company to generate enough revenues to create a sustainable and profitable business. Since its first deals, Google has been able to drive massive amounts of traffic to its search pages.

At the same time, AdWords and AdSense allowed the company to generate enough revenue to make it one of the most profitable internet companies ever existed.

The traffic acquisition cost is a crucial metric that explains Google past success but also Google future success. In 2021 Google spent over $45 billion in traffic acquisition costs, which represented 21.7% of its total advertising revenues. Over the years Google has been able to keep reducing its traffic acquisition cost, which made it quite profitable!

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