Example of Google’s Moral Hazard: Pooling in Ad Auctions


Google has an incentive to group advertisers in ad auction even when this conflicts with the goals of an individual advertiser.

For example, you’d like to bid on ‘term x‘ and would not like be included in auctions ‘term x+n‘ due to e.g. lower relevance, your ad might still participate in the auction.

This relates to two features:

  1. use of synonyms — by increasing the use of synonyms, Google is able to pool more advertisers in the same ad auction
  2. broad match — by increasing the use of broad match, Google is able to pool more advertisers in the same ad auction

Simply put, the more bidders competing in the same ad auction, the higher the click price and therefore Google’s profit. It needs to be remarked that pooling not only increases the CPC of existing ad auctions by increasing competition, but it also creates new auctions altogether (because there needs to be a minimum number of bidders for ads to be launched on the SERP).

A practical example of this moral hazard is Google’s removal of ‘do not include synonyms or close variants‘ in the AdWords campaign settings, which took place a couple of years ago.

There are two ways advertisers can counter this effect:

  1. First, by efficient use of negative keywords.
  2. Second, by resorting to multi-word exact matches as much as possible.

In conclusion, I always tell my students that Google is a strategic agent that wants to optimize its own gain — as far as its and advertiser’s goals are aligned, everything is fine, but there are these special cases in which the goals deviate and the advertisers needs to recognize them and take action.


Problem/Solution Space: A Startup Perspective


I was inspired to write this post by the following pictures that I’d included in my lecture material a few years. Writing it in a bit of a hurry since the class starts soon! (but it’ll good enough to make the point)

(You can find the original source for the pictures by googling.)

Okay, a couple of things.

First, it’s highly important for a startup to define both the problem space and the solution space relating to their product. This includes the particular pain points that the customer whose problems we’re solving is experiencing – at minimum, solving one pain point, if substantial enough, suffices to make a successful business. The solution space includes the competition — here, it is super important to consider not only the direct competition (a common mistake) but also the indirect competition.

I call it the “pen and paper” test — can the problem you’re solving, most often with a high degree of technological sophistication, solved with a simpler, non-technological way?

And more importantly, how are the customers solving it now? It takes a lot for them to change their habits, much more than what founders typically think. The customer will not download an app to solve the problem — no matter if it’s free or not — unless the app provides a solution several magnitudes better than what he currently has. So, bear this in mind.

Second, once the gravity of the problem we’ve set to solve has been “validated” by more trustworthy means than guessing (such as customer development), the problem dimensions need to be tied formally into the product features the team is building (the second picture depicts this).

This way, we avoid waste in the startup development process (remember, waste is your biggest enemy because you’re always on borrowed time).

Third, after this the usage of these features needs to be backed up real usage data — in other words, the product needs to be exposed to real users whose behavior is analyzed based on engagement metrics (e.g., time they spend with the product, what features they use, how frequently, etc.). For this, there needs to be a good analytical system built into the product. Follow the Facebook guideline here: you don’t know what data you might later need, so store everything. This enables maximum flexibility for subsequent analyses.

And finally, of course when we get feedback on the usage of the product, we tie it back to the problem we’ve set out to solve and conclude whether or not we’re actually solving it. If the data suggest low engagement, we need to start over and make radical changes to the core of the product. If the data gives us a nice depiction, we’ll still continue with further adjustments to improve the user experience (which, of course, is by definition never good enough).

That’s it. Thank you for reading (and I’m off to class!)

Dr. Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.

Contact email: [email protected]


Modern Market Research Methods: A Startup Perspective


EDIT: Updated by adding competitive analysis, very important to benchmark competitors.

EDIT2: Updated by adding experimentation (14th April, 2016)


Somebody on Quora was asking about ‘tools’ for validating viability and demand for a startup’s products.

I replied it’s not a question of tools, but plain old market research (which seems to be all too often ignored by startup founders).

Modern market research methods

In brief, I’d include the following options to a startup market research plan:

  1. market statistics from various consultancy and research institution reports (macro-level)
  2. general market (country, city) statistics generated just for your case (macro-level à la PESTLE)
  3. competitive analysis, i.e. benchmarking existing solutions — will help you find differentiation points and see if your “unique idea” already exists in the market
  4. (n)etnography, i.e. going in-depth to user communities to understand their motivations (micro-level, can be done offline and online)
  5. surveys, i.e. devising a questionnaire for relevant parties (e.g., customers, suppliers) to understand their motivations (just like the previous, but with larger N, i.e. micro-level study)
  6. customer development, which is most often used in B2B interviews as a presales activity to better understand the clients’ needs. Here’s an introduction to customer development (Slideshare).
  7. crowdfunding, i.e. testing the actual demand for the product by launching it as a concept in a crowdfunding platform – this is often referred to as presales, because you don’t have to have the product created yet.
  8. experimentation, i.e. running different variations against one another and determining their performance difference by statistical testing; the tests can relate to e.g. ad versions (value propositions, messages) or landing pages (product variations, landing page structure and elements). Here’s a tool for calculating statistical significance of ad tests.

So, there. Some of the methods are “old school”, but some — such as crowdfunding are newer ways to collect useful market feedback. Experimentation, although it may appear novel, is actually super old school. For example, one of the great pioneers of advertising, Claude Hopkins, talked about ad testing and conversion optimization already in the 1920. (You can actually download his excellent book, “Scientific advertising“, for free.)

How to combine different methods?

The optimal plan would include both macro- and micro-level studies to get both the “helicopter view” and the micro-level understanding needed for product adoption. Which methods to to include in your market research plan depends on the type of business. For example, crowdfunding can be seen as a market validation method most suitable for B2C companies and customer development for B2B companies.

The punchline

The most important point is that you, as a startup founder, don’t get lured into the ‘tool fallacy’ — there’s no tool to compensate for the lack of genuine customer understanding.

Dr. Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.

Contact email: [email protected]


Dynamic Pricing and Incomplete People Information


One of the main problems in analytics is the lack of people information (e.g., demographics, interests). It is controlled by superplatforms like Google and Facebook, but as soon as you have transition from the channel to the website, you lose this information.

So, I was thinking this in context of dynamic pricing. There’s no problem for determining an average solution, i.e. a price point that sets the price so that conversion is maximized on average. But that’s pretty useless, because as you know averages are bad for optimization – too much waste of efficiency. Consider dynamic pricing: the willingness to pay is what matters for setting the price, but it’s impossible to know the WTP function of individual visitors. That’s why aggregate measures *are* needed, but we can go beyond a general aggregate (average) to segmentation, and then use segment information as a predictor for conversion at different price points (by the way, determining the testing interval for price points is also an interesting issue, i.e. how big or small increments should you do —  but that’s not the topic here).

Going back to the people problem — you could tackle this with URL tagging: 1) include the targeting info into your landing URL, and you’re able to do personalization like dynamic pricing or tailored content by retrieving the targeting information from the URL and rendering the page accordingly. A smart system would not only do this, but 2) record the interactions of different targeting groups (e.g., men & women) and use this information to optimize for a goal (e.g., determining optimal price point per user group).

These are some necessary features for a dynamic pricing system. Of course then there’s the aforementioned interval problem; segmentation means you’re playing with less data per group, so you have less “trials” for effective tests. So, intuitively you can have this rule: the less the website has traffic, the larger the increments (+/-) should be for finding the optimal price point. However, if the increments become too large you’re likely to miss the optimal (it gets lost somewhere in between the intervals). I think here are some eloquent algorithmic solutions to that in the multi-armed bandits.


Viisi mainostoimistojen virhettä digitaalisessa markkinoinnissa


Niin sanotut perinteiset markkinoijat tekevät kokemukseni perusteella useita perustavanlaatuisia virheitä siirtyessään vanhoista ajattelumalleista digitaaliseen markkinointiin. Nämä virheet näkyvät etenkin monien mainostoimistojen kohdalla.

Viisi virhettä ovat:

1. Tuloksia ei mitata

Nähdään ettei mittaaminen ole mahdollista tai järkevää esim. “brändäykseen” keskittyvien offline-kampanjoiden kohdalla. Ajatus on virheellinen, koska a) myös offline-kampanjoita voidaan mitata (esim. kuponkeja käyttämällä) ja b) myös brändäyksen pitää tuottaa mitattavissa olevaa hyötyä jollain aikavälillä (vrt. mainonnan carryover-efekti).

Mittaaminen ja analyyttisuus nähdään myös usein uhkana luovuudelle, ikään kuin luovia konsepteja ei voisi tai pitäisi mitata. Tämä on tietysti väärä ajattelumalli. Toimiston johtotähti voi olla luovuus, mutta silti pitää mitata.

2. Kaunistelumittarit (eng. vanity metrics)

Jos mitataankin, keskitytään epäolennaisiin mittareihin. Miljoona näyttökertaa, kymmenentuhatta tykkäystä, kolme voitettua Cannes-pystiä; nämä eivät kerro mitään liiketoiminnan tavoitteista.

Asiaan liittyy optimointi epäolennaisille mittareille: tavoitellaan peittoa ja toistoa relevanssin ja laadun sijaan. (Jos et muuten tiedä miten relevanssia tai laatua verkossa mitataan, et osaa vielä digitaalisen markkinoinnin perusteita.)

Markkinoinnin tavoitteena ei ole voittaa cannesissa, vaan (useimmiten) tehdä myyntiä asiakkaalle. Tämän vuoksi näyttökertojen ja tykkäysten sijaan tulee mitata liiketulosten saavuttamista; kuitenkaan tämä ei tarkoita aina suoraan myynnin mittaamista, vaan voidaan mitata ns. mikrokonversioita eli potentiaalisen asiakkaan tekemiä toimenpiteitä matkalla ostoon.

3. Markkinoijan intuitio

Tässä petollisessa ajattelumallissa uotetaan siihen jolla on eniten “kokemusta” tai korkein asema organisaatiossa. Koska kuten jokainen rehellinen markkinoija tietää, on yhtä todennäköistä että on väärässä asiakkaiden suhteen kuin oikeassa. Digitaalisessa markkinoinnissa kokemuksella tai titteleillä ei ole muuta merkitystä kuin niiden antama hyöty hypoteesien asettamisessa – muilta osin jokainen on oikeutettu testauttamaan ideansa, oli sitten pomo tai junior. Puhutaan ns. testaamisen kulttuurista – termi jota poliitikotkin nykyään käyttävät kuitenkaan sitä lainkaan toteuttamatta. Jos se olisi helppoa, kaikki tekisivät sitä. Mutta kaikki eivät voikaan olla hyviä.

4. Kauniiden sivujen illuusio

Tehdään hienon näköiset sivut, jotka kuitenkin konvertoivat huonosti. “Miten on mahdollista että tämä tyylikäs sivu ei johda ostoon?” Siksi koska asiakkaat eivät hae tyyliä, vaan ratkaisuja ongelmiin. Klassista on, että karut verkkokaupat myyvät eniten – Amazon on aina ollut “ruma” – siksi koska ruma myy verkossa, tai oikeammin ulkoasulla ei ole väliä silloin kuin käytettävyys on kohdillaan. Paljon ulkoasua tärkeämpää että sivu latautuu nopeasti ja tuotteeseen ja ostamiseen liittyvä tieto on helposti löydettävissä. Mainostoimistojen, jotka ovat tottuneet tekemään hienon näköistä tavaraa, on alettava sopeutua tähän maailmaan.

5. Sekoitetaan sisältömarkkinointi ja mainonta

Sisältömarkkinoinnin koko idea on, että se on ei-kaupallista. Sisältömarkkinoinnin idea on tarjota informaatioltaan hyödyllistä tai sisällöltään viihteellistä sisältöä, joka on verrattavissa ilmaisen julkiseen hyödykkeeseen. Kaupallisuus tulee epäsuoran assosiaation kautta, ts. laadukkaan sisällön tuottaja mielletään kyseisen alan asiantuntijaksi, jolloin kynnys ostaa heiltä laskee.

Firmat eivät aina tajua tätä. Esimerkiksi Tupla ei saanut vloggaajien kanssa tekemäänsä videota läpi kaikissa mediaportaaleissa, koska oli sisällyttänyt loppuun mainosmaisen insertin. Heidän olisi pitänyt tehdä kuten Red Bull – laittaa brändi näkyviin kypäriin, vaatteisiin ja puitteisiin, ei jälkikäteen lisättyihin mainosmaisiin insertteihin. Kukaan ei jaa mainoksia, mutta kaikki jakavat siistejä videoita. Ja advertoriaali taikka natiivi mainonta – ne eivät ole oikeaa sisältömarkkinointia, vaikka monet mediamyyjät näin uskottelevat.

6. BONUS: Marketing bullshit

Olen jo usean vuoden opettanut huonon markkinointitekstin kirjoittamista vastaan. Jostain syystä jokainen kauppisopiskelija luontaisesti löytää sen väärän tavan – viljellään adjektiiveja, superlatiiveja ja imperatiiveja. Kaikki on “ainutlaatuista” ja asiakkaalle sanotaan “osta nyt”, vaikka reaktanssin lain mukaan käsky johtaa juuri vastakkaiseen toimintaan.

Konvertoivin copy on yksinkertaista ja selkeää. Se ei sisällä monimutkaisia ja hienoja sanoja, vaan puhuu samalla kielellä kuin asiakas. Asiakkaan sanaston käyttäminen on tärkeää myös hakukonenäkyvyyden kannalta – Google indeksoi verkkosivun sisällön ja käyttäjät eivät hae “tehokkaita lentämisen ratkaisuja” vaan halpoja lentolippuja.

Uskon että useimmat virheet johtuvat tietämättömyydestä. Tietämättömyys on vanhanaikaista – kannattaa karistaa pölyiset asenteet ja herätä tähän päivään.

Kirjoittaja toimii digitaalisen markkinoinnin opettajana Turun kauppakorkeakoulussa ja kouluttaa yrityksiä digitaalisen markkinoinnin käytössä myös oman yrityksensä kautta.


The Psychological Cost of Answering an Email


You’re not getting as many replies to your messages as you’d like. Why is that?

Well, there may be many reasons, but I’m discussing one of them here. It’s the psychological cost of processing an email and acting upon it. My hypothesis is simple:

The higher the psychological cost of answering an email, the lower the response rate.

This means that don’t make people think (the same principle applies in UX design!).

So, if you propose a meeting time, don’t give many choices — only give one, if that’s not okay let them process it further (by that time the processing has already begun, it’s like a bait).

If you give many choices, the person has to think between them; also, he knows he still has to wait for your reply which is far higher psychological cost than just replying “ok”.

Remember, even if it wouldn’t seem like much, people get so much email that any marginal increase of complexity is likely to sway them for answering immediately and therefore postponing or even ignoring the message.

Any addition of cognitive effort will reduce the reply rates of your emails. As you’ll be sending many of them throughout your career, non-replies and delays add up and hinder your ability to achieve your goals in a timely manner. Therefore, learning how to write great emails is a hugely important skill. And one way to go about it reducing the psychological cost of the recipient.

Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.


A Quick Note on Bidding Theory of Online Ad Auctions



This is a simple post about some commonly known features of online ad auctions.

Generalized second-price auction (GSP) is a mechanism in which the advertiser pays a marginally higher bid than the advertiser losing to him. It encourages the bidder to place a truthful bid, i.e. one where the price level is such that marginal returns equal marginal cost.

Why is this important?

Simply because:

truthful bid = incentive to bid higher

In other words, if you know a bidder behind is bidding say 0,20 € and you’re bidding 0,35 €, under a standard auction you’d be tempted to lower your bid to 0,21 € and still beat the next advertiser.

In any case you wouldn’t directly know this because the bids are sealed; however, advertisers could programmatically try and find out other bids. When you’re using GSP, manually lowering bids to marginally beat your competition is not necessary. It’s therefore a “fair” and automatic system for pricing.

Of course, for the ad platform this system is also lucrative. When advertisers are all placing truthful bids, there is no gaming, i.e. no-one is attempting to extract rents (excessive profits) and the overall price level sets higher than what would take place under gaming (theoretically, you could model this also in a way that the price level is at equal level in both cases, since it’s a “free market” where prices would set to a marginal cost equilibrium either way).

Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.


Google and the Prospect of Programmatic



This is a short post taking a stance on programmatic ad platforms. It’s based on one single premise:

Digital convergence will lead into a situation where all ad spend, not only digital, will be managed through self-service, open ad platforms that operate based on auction principles

There are several reasons as to why this is not yet a reality; some of them relate to lack of technological competence by traditional media houses, some to their willingness to “protect” premium pricing (this protection has led to shrinking business and keeps doing so until they open up to the free market pricing), and a host of other factors (I’m actually currently engaged in a research project studying this phenomenon).

Digital convergence – you what?

Anyway, digital convergence means we’ll end up running campaigns through one or possibly a few ad platforms that all operate according to the same basic principles. They will resemble a lot like AdWords, because AdWords has been and still is the best advertising platform ever created. Why self-service is critical is due to the necessity of eliminating transaction costs in the selling process – we don’t in most cases need media sales people to operate these platforms. Because we don’t need them, we won’t need to pay their wages and this efficiency gain can be shifted to the prices.

The platforms will be open, meaning that there are no minimum media buys – just like in Google and Facebook, you can start with 5 $ if you want (try doing that now with your local TV media sales person). Regarding the pricing, it’s determined via ad auction, just like in Google and Facebook nowadays. The price levels will drop, but lowered barrier of access will increase liquidity and therefore fill seats more efficiently than in human-based bargaining. At least initially I expect some flux in these determinants — media houses will want to incorporate minimum pricing, but I predict it will go away in time as they realize the value of free market.

But now, to Google…

If Google was smart, it would develop programmatic ad platform for TV networks, or even integrate that with AdWords. The same applies actually to all media verticals: radio, print… Their potential demise will be this Alphabet business. All new ideas they’ve had have failed commercially, and to focus on producing more failed ideas leads unsurprisingly to more failure. Their luck, or skill however you want to take it, has been in understanding the platform business.

Just like Microsoft, Google must have people who understand about the platform business.

They’ve done a really good job with vertical integration, mainly with Android and Chrome. These support the core business model. Page’s fantasy land ideas really don’t. Well, from this point of view separating the Alphabet from the core actually makes sense, as long as the focus is kept on search and advertising.

So, programmatic ad platforms have the potential to disrupt Google, since search still dwarfs in comparison to TV + other offline media spend. And in the light of Google’s supposed understanding of platform dynamics, it’s surprising they’re not taking a stronger stance in bringing programmatic to the masses – and by masses, I mean offline media where the real money is. Google might be satisficing, and that’s a road to doom.

Dr. Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.

Contact email: [email protected]


The Vishnu Effect of Startups (creators/destroyers of jobs)



In the Hindi scripture there is a famous passage in which the god Vishnu describes himself as death; to Westerners this is mostly known through Oppenheimer’s citation:

“Now, I am become Death, the destroyer of worlds.”

But, there is another god in Hinduism, Brahma, that is the creator of the universe.

How does this relate to startups?

Just like these two gods, startups are of dualistic nature. In particular, they are both job creators and job destroyers. One one hand they create new jobs and job types. On the other hand, they destroy existing jobs.

So what?

This dualistic nature is often ignored when evaluating the impact of startups on the society, although it’s definitely in the core of the Schumpeterian theory of innovation. What really matters for the society is the balance — how fast are new companies creating jobs vs. how fast they are destroying it.

I haven’t seen a single quantification of this effect, so it would definitely merit research. Theoretically, it can be called something like SIR, or startup impact ratio which would be jobs produced / jobs destroyed.

SIR = jobs produced / jobs destroyed

As long as the ratio is more than 1, the startups’ impact on the job market (and therefore indirectly on the society) is positive. In turn, if it’s below 1, “robots are taking our jobs”. Or, rather, if it’s above one, Brahma is winning while below one means Vishnu is dominating.

Dr. Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.

Contact email: [email protected]


A major change in AdWords – How to react?



Google has made a major change in AdWords. Ads are now shown only in the main column, no longer in the right column. Previously, there were generally speaking eight ads per SERP. For some queries, Google didn’t show ads at all, and additionally they’ve been constantly testing the limit, e.g. running up to 16 product listing ads per results page.

But what does that mean to an advertiser?


The change means the number of ads shown per SERP (search-engine results page) is effectively reduced. Since the number of advertisers is not reduced (unless rotation is applied, see below), the competition intensifies. And since the visibility of search ads is based on cost-per-click auction, ceteris paribus the click prices will go up.

Therefore, logical conclusion is that when ad placements are cut, either CPC increases (due to higher competition) or impression share decreases (due to rotation). In the former, you pay more for the same number of visitors, in the latter you pay the same click price but get less visitors.

Why Google might in fact prefer ad rotation, i.e. curbing down an individual advertiser’s impression share (the number of times your ads is shown out of all possible times it could have been shown) is because that wouldn’t impact their return-on-ad-spend (ROAS) which is a relative metric. However, it would affect the absolute volume of clicks and, consequently, sales.

In some of my campaigns, I’m using a longtail positioning strategy where this will influence, since these campaigns are targeting positions 4+ which, as said, are mostly no longer available. Most likely, the change will completely eradicate the possibility of running those campaigns with my low CPC-goal.

Why did Google do this?

For Google, this is a beneficial and logical change since right column ads are commanding lower CTRs (click-through rates). This has two implications – first, they bring less money for Google since its revenue is directly associated with the number of clicks; second, as commonly known Google is using CTR as a proxy for user experience (for example, it’s a major component in Quality Score calculations which determine the true click price).

Therefore, removing the possibility of poorly performing ads while pushing the advertisers to an increased competition is a beneficial situation for Google. In the wider picture, even with higher click prices, the ROI of Google ads is not easily challenged by any other medium or channel, at least what I can see taking place in the near future.

However, for advertisers it may easily signify higher click prices and therefore decreasing returns of search advertising. This conflict of interest is unfortunate one for advertisers, especially given the skewed distribution of power in their relationship to Google.

(On a side-note, the relationship between advertisers and Google is extremely interesting. I studied that to some extent in my Master’s thesis back in 2009. You can find it here:


I recommend you revise the impact of this change on your accounts, either internally or if you’re using an agency, with them.

Dr. Joni Salminen holds a PhD in marketing from the Turku School of Economics. His research interests relate to startups, platforms, and digital marketing.

Contact email: [email protected]