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 2022 Google spent 21.75% of its total advertising revenues (over $48 billion) to guarantee its traffic on several desktop and mobile devices across the web.
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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 at 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’s experimentation and change, thus improvements. Between 2017-18 of over 200,000 experiments, Google made over 2,400 changes to its search algorithm.Â
As years went by, Google accelerated its experimentation, nonetheless its size, from small changes to larger algorithm updates; Google’s engineering teams perform thousands of experiments each year.Â
Google’s 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 that 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’s success is its traffic acquisition cost.
What does the traffic acquisition cost stand for?
The traffic acquisition costs represent the expenses 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 making 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 in programs like AdSense. It also comprises browser providers, mobile carriers, and other distribution channels.
Many give for granted Google success for.
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 Google an enormous amount of traffic each year.
That traffic also has a cost.
Why is Google traffic acquisition cost 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’s success in allowing it to serve organic results besides its 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.Â
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:Â
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 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 networkbusiness 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 multipleÂ
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.Â
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!Â
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!Â
Summary and conclusions
It’s easy to give for granted Google success in terms of traffic;Â 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!
Google is an attention merchant that – in 2022 – generated over $224 billion (almost 80% of revenues) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $29 billion segment), and Google Cloud ($26.2 billion).
Of Google’s (Alphabet) over $282 billion revenue for 2022, Google also generated over a billion dollars from a group of startup bets, which Google considers potential moonshots (companies that might open up new industries). Those Google’s bets also generated a loss for the company of over $6 billion in the same year. In short, Google is using the money generated by search and betting it on other innovative industries. Of Google’s (Alphabet) over $282 billion revenue for 2022, Google also generated over a billion dollars from a group of startup bets, which Google considers potential moonshots (companies that might open up new industries). Those Google’s bets also generated a loss for the company of over $6 billion in the same year. In short, Google is using the money generated by search and betting it on other innovative industries.
Google is an attention merchant that – in 2022 – generated $224 billion (almost 80% of its total revenues) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $29 billion segment), and Google Cloud ($26.3 billion).
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 2022 Google spent 21.75% of its total advertising revenues (over $48 billion) to guarantee its traffic on several desktop and mobile devices across the web.
Alphabet generated over $282B from Google search and others, $32.78 billion from the Network members (Adsense and AdMob), $29.2 billion from YouTube Ads, $26.28B from the Cloud, and $29 billion from other sources (Google Play, Hardware devices, and other services).
YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, and it reported more than $29B in revenues by 2022. YouTube also makes money with its paid memberships and premium content.
In 2022, Google generated over $282 billion in revenues, of which over $162 billion from Google Search, over $29 billion from YouTube Ads, and almost $33 billion from Network Members’ properties. In addition, Google generated over $29 billion in other revenue, over $26 billion from Google Cloud, and over a billion dollars from other bets.
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall businessmodel.
A pricingstrategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricingstrategy aligns the customer with the company’s long term financial sustainability to build a solid businessmodel.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organizationscale further.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
